Keynote panel discussion by John Price, Commissioner, Australian Securities and Investments Commission at the Governance and Risk Management Forum, (Melbourne, Australia) 20 June 2019
CHECK AGAINST DELIVERY
Opening comments
Thank you for the opportunity to participate in this panel session.
In the time available, I propose to briefly cover off on two key areas: First, the Royal Commission and some key areas of ASIC focus coming out of the Final Report released earlier this year. Second, I will touch on some of ASIC’s new powers, including our new product intervention powers.
The Royal Commission clearly highlighted the harms that unlawful and unethical conduct can inflict on consumers. And we have also seen a breakdown in trust in the financial sector, which has had a flow on effect to the rest of corporate Australia.
I will shortly touch what ASIC will be doing to improve conduct and rebuild trust.
But it is important to emphasise that the primary obligation to address these issues lies not with ASIC or any other regulator, but with the firms we regulate.
As a starting point to establishing trust, individuals, firms and industry need to improve their conduct. To support better conduct, cultural change and better governance are vital.
ASIC cannot regulate culture, that is largely matter for boards and management. However, we have been emphasising the importance of fairness in a firm’s culture. That is, does the culture of your firm promote fair treatment of consumers and investors?
When you are dealing with other people’s money, be they consumers or investors, the concept of fairness is critical – not just from a compliance or conduct perspective but also for the prospects of the company itself. We have seen stark examples of so-called “non-financial” risks, such as conduct and compliance risks, turn into very material financial and reputational issues for many firms.
ASIC’s enhanced enforcement and supervisory approach
(a) Enforcement
Turning now to ASIC and our enhanced enforcement and supervisory approaches. ASIC started on our strategic program of change in 2018 to strengthen our governance and culture and to realign our priorities. The Royal Commission’s recommendations have reinforced and accelerated that program of change.
As part of this change program, we have implemented some new supervisory approaches and changed our approach to enforcement.
First, we are significantly increasing and accelerating court-based enforcement outcomes driven by our new enforcement strategy, a “why not litigate?” stance, and we are looking to use the full extent of our new penalties and powers.
To clarify, a “why not litigate?” strategy, is very different to a “litigate first” or “litigate everything” strategy.
It means that once:
- ASIC is satisfied that breaches of the law are more likely than not, and
- it is evident from the facts of the case that the pursuit of the matter would be in the public interest,
then we will actively ask ourselves: why not litigate this matter?
A “why not litigate?” approach does not mean that enforcement action will become the sole item in our regulatory toolkit. But it does mean we have adopted a rigorous approach to deciding which tool is the right one, bearing in mind:
- the need to deter future misconduct, and
- community expectations that wrongdoing be pursued and punished through the courts.
We are already seeing accelerated action. For example, from February 2018 to March 2019:
- there has been a 15% increase in the number of ASIC enforcement investigations
- a 65% increase in enforcement investigations involving large financial firms (or their officers or subsidiary companies), and
- a 129% increase in wealth management investigations.
(b) Supervision
Second, we are using and expanding new supervisory approaches – this includes new initiatives such as our Close and Continuous Monitoring work involving large financial institutions and the Corporate Governance Taskforce. These programs will help detect cultural failings that lead to conduct problems and breaches of the law.
Under our Close and Continuous monitoring program we have already conducted around 200 onsite interviews with banking staff at all levels to gain first hand insights into systems, practices and culture. And we are already providing important feedback to CEOs and boards on concerns we are finding in their management, reporting and control systems.
Our Corporate Governance Taskforce is looking at practices in large financial and non-financial entities. Key areas of work in this taskforce are:
- looking at governance processes and practices around the oversight of non-financial risk; and
- practices regarding payment of variable remuneration to key management personnel.
We will be issuing a series of reports on our observations starting later this year, as well as providing specific feedback on our concerns to the companies involved.
Law reform
And finally, we are also working on implementing the Government’s package of reforms and our new obligations and responsibilities in response to the Royal Commission. Importantly, this includes an expanded role for ASIC as a conduct regulator in superannuation.
It also includes two key measures for enhanced consumer and retail investor protection:
- a design and distribution obligation for financial services firms; and
- a product intervention power for ASIC.
These two reforms are an implicit recognition that in some cases disclosure is not an adequate answer to consumer protection. It places the onus on product issuers to take a more “customer-focused approach”, something that has been lacking in parts of the financial services industry. And where issuers fail to do that, and it results in harmful products being sold to consumers, we now have the power to step in and put a stop to it.
These reforms are a further embodiment in the law of a concept that I mentioned at the start – that is the fundamental importance of fair treatment of consumers and retail investors.
I will finish up on that note and I look forward to talking about some of these issues further during the panel discussion.