The legislation surrounding breach reporting is cloudy, which may permit companies to sit on minor or suspicions of wrongdoings, according to ASIC commissioner Greg Tanzer.
The regulator's representative fronted a Senate committee last week during a public hearing into scrutiny of financial advice, which followed claims of misconduct at IOOF.
Mr Tanzer would not comment specifically on IOOF matters. However, when asked by the Senate committee whether IOOF had broken the law when it did not report suspicion of front-running to ASIC, Mr Tanzer said it depends.
"Section 912D of the Corporations Act requires financial services and licensees to lodge breach reports in particular circumstances...We think that there are some technical legal difficulties with breach reporting provisions," he said.
But at the same time, he continued, "there's nothing that prevents companies from reporting that sort of breach and the legislation doesn't say you can't report a breach unless you believe it is material".
"We have seen too many problems in the industry which are internalised and dealt with without reporting to ASIC. We strongly encourage companies to breach report regardless of a particular view [about] whether it strictly meets a definition in the legislation."
Tuesday's hearing – chaired by Labor Senator Sam Dastyari and joined by Liberal Senator Sean Edwards and Nationals Senator John Williams – follows allegations of front-running and insider trading at IOOF sparked by Fairfax Media news reports.
IOOF managing director Chris Kelaher said the company did not report claims of improper practice to the regulator because there was no evidence of it detected in a PwC inquiry conducted earlier this year.
Mr Tanzer, who would not speak specifically to this matter, said while companies are strongly encouraged to report suspicions of misconduct to ASIC, it is not always considered illegal if they do not.
Financial services lawyer Richard Batten of Minter Ellison said there is no requirement to report suspicious matters or possible breaches to ASIC. Only actual breaches or breaches which are likely to occur in the future need to be reported to the regulator – and only if they are significant.
However, ASIC may have a different view from a licensee about what is significant.
"Significance is a matter of judgement having regard to the particular licensee's circumstances, so there is room for disagreement," he said.
"Breach reporting obligation is essentially an obligation to incriminate yourself and in that sense, inconsistent with the normal rule that a person is innocent until proven guilty. In other words, financial firms are held to a significantly higher standard than other businesses, as they should be."
But suspicions of front-running or insider trading must be reported if the company is a market participant, according to an ASIC regulatory guide.
Mr Tanzer said IOOF would not be subject to this provision, since it is not considered a market participant. However, he added that Bridges Financial Services, an entity part of the IOOF group and where some of the alleged actions took place, is considered to be a market participant.
Other problems in the financial services industry revolve around a crooked culture, Mr Tanzer said.
"When problems arise, a culture that does not seek to identify the problem and then does not seek to adequately address it may enable a problem to flourish. It may enable the problem to get bigger," he said.
"That poor conduct, [may] lead to significant losses for the investors. While markets recover quite frequently, individual investors do not.
"The financial system is built on trust and confidence and if investors understand that a broker, adviser or someone else is taking advantage of that trust, it's going to destroy that trust and it takes a long time to restore," Mr Tanzer said.
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