On Tuesday, we dug into the questions the Royal Commission interim report is asking about the future of the advice industry – but it’s also worth examining what’s in store for its chief regulatory body.
Commissioner Kenneth Hayne was roundly critical of ASIC’s approach to misconduct, arguing that its starting point has always been whether “this can be resolved by agreement.” He said that “when contravening conduct comes to its attention, [ASIC] must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach.”
Having said this, he also suggested that the regulatory regime in which ASIC (and by extension advisers) operates is far too complex, and that “breaches of existing law are not prevented by passing some new law that says, ‘Do not do that.'”
So, what does the report say should be done about it?
Adjusting ASIC’s remit
One idea floated was the reduction in ASIC’s regulatory remit. Hayne noted that ASIC now administers 11 pieces of legislation and associated regulations, and has published over 450 regulatory guides and information sheets. “That work and the undoubted corollary of informal discussion and liaison with the industry,” he said, “deflects resources from ASIC’s enforcement work.”
While this regulatory complexity is easier navigated by “very sophisticated and well-resourced” large entities, he continued, for smaller businesses “it may be that there are respects in which compliance imposes unjustified costs.”
Therefore, he said, there may be a case for “radical simplification of the regulatory regime.”
Proportional remediation
Hayne noted that “remediation programs can be long and difficult,” and that enforcement will often “induce an entity to set about remedying the consequences of its default, or committing to doing so, before the penalty is fixed.”
He added that financial services entities often profit from their contraventions of the law, and that “often the profit earned will be larger than the damage to consumers. Nothing in the evidence before the Commission shows that ASIC takes this into account when negotiating outcomes with entities.”
“So-called community benefit payments associated with enforceable undertakings,” he continued, “appear, at least on their face, to be less than the penalty that ASIC might properly have sought in civil penalty proceedings and unrelated to the profit derived by the entity from the contravening conduct.”
Addressing this, Hayne said, will involve the regulator recognising it “must do whatever can be done to ensure that each breach of the law is not profitable.”
Who watches the watchmen?
Hayne said that because financial services misconduct is “harmful to the economy generally,” the ways in which ASIC enforces laws “will affect the overall health of the economy.” Given this, he asked whether the manner of enforcement should be “supervised by or on behalf of the political branches of government.”
Referencing the Murray Inquiry, Hayne suggested revisiting the idea of a new Financial Regulator Assessment Board to “undertake annual ex post reviews of overall regulator performance against their mandates.” He conceded these would not be “small changes” and would need to be “examined in light of what, if any, other changes in law were to be made.”
Once again, this report has been prepared on an interim basis, but it does imply that there may be further adjustments to the regulatory environment in which advisers operate, and it’s important to recognise where these changes may occur.
While that may sound daunting, one positive to come out of this is the recognition of the complexity of ASIC’s regime and the potential compliance issues that may occur.
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