The performance of ASIC

The performance of ASIC

Australian Securities and Investments Commission representatives face rapid-fire questions from parliamentary committee members on ASIC’s performance, the FOFA reforms and the role of financial advisers in society

Mark Bishop -

Good morning, ladies and gentlemen. I declare open the first hearing of this inquiry of the Senate Economics Reference Committee into the performance of the Australian Securities and Investments Commission.

This inquiry was referred to the committee by the Senate on 20 June 2013 and, on 14 November 2013, the Senate agreed to the committee’s recommendation that this inquiry be re-adopted in the 44th Parliament. The reporting date is 30 May 2014. To date, the committee has received over 400 submissions, the majority of which have been made public and are available on the committee’s website.

I now welcome Mr Greg Medcraft and his colleagues from ASIC. Would ASIC like to make a brief opening statement, Mr Medcraft?

Greg Medcraft -

Thank you for the opportunity to address the committee. We welcome inquiry into ASIC’s performance and, most importantly, we are grateful to all the people who have taken the time and made the effort to provide submissions. We have considered all the submissions in an effort to learn as much as we can from them and also to enable ASIC to do a better job.

To help the committee in its task, we are open to providing further information to help its understanding of matters raised in submissions or during the hearings.

Sam Dastyari -

Now, just very quickly, I have a question on FOFA. There was the FOFA process and the Ripoll report in 2009. ASIC obviously played a big role in that.

A lot of the FOFA recommendations came from concerns that were raised by a lot of investors about what had happened. What are your concerns regarding proposals to roll back the FOFA changes?

Greg Medcraft -

That was a matter of government policy. They went to the election with that policy. They have now implemented that policy. I will pass over to Mr Kell.

Peter Kell -

I do not have anything to add on that. It is a government policy question.

Sam Dastyari -

Sure, but I am not asking what the government’s policy is; I am asking what are the concerns of ASIC. There was no greater advocate for the FOFA changes than ASIC when they were first implemented. In fact, as I understand it – and this is before my time in elected office – the FOFA changes happened in large part because of concerns that people had raised with ASIC and we said, ‘We can’t allow these things to happen again’.

We can spend a month talking about FOFA. My concern is that there is a proposal that in a couple of weeks, through regulatory changes, the FOFA reforms are going to get wound back. You supported FOFA. This is a matter of fact. I can read you half a dozen quotes.

Peter Kell -

Well, you can read our submission.

Sam Dastyari -

You supported the FOFA changes. Do you support rolling them back?

Peter Kell -

The changes are a matter for government policy. We are not characterising them as being rolled back anything like that. The issues we have set out...

Sam Dastyari -

They were implemented and they are being removed. We can have a debate about semantics, but what is ‘rolling back’ if it is not removing something that has been implemented?

Peter Kell -

The ban on conflicted remuneration for personal advice in the investment space, which was critical to some of the issues that originally arose with Commonwealth Financial Planning, the best interest duty, the requirement to prioritise clients’ interests and the stronger penalties – those elements of FOFA that we have highlighted in our submission – are FOFA itself. It is not being taken away as such. As to the exact nature of particular modifications, that is a matter for government. It is currently being considered and is not something that we want to comment...

Sam Dastyari -

Do you think the FOFA changes have been effective?

Greg Medcraft -

It has just started. The other thing that we have suggested in the recommendation is that we think there are further changes needed to at least lift the competence of advisers and have a national register. We have made some suggestions where we think we can strengthen it.

Sam Dastyari -

But your arguments – and of course I have read your submission – are about strengthening the FOFA changes, not about removing or weakening them.

Greg Medcraft -

This is outside of FOFA. This is separate.

Sam Dastyari -

My concern is this. We are here looking at the function of ASIC. A lot of the criticism of ASIC, as you can appreciate, is from people who feel that they have been given poor financial advice or poor products and that it is ASIC’s responsibility to address those concerns at an individual level.

That is the difficulty of an organisation of this size. There are a whole lot of issues there. As I understand it, FOFA was meant in part to ensure that what happened with Storm and half a dozen similar organisations and structures, with people getting ripped off, does not happen again.

You supported FOFA; you advocated for FOFA; you were involved in the creation of FOFA and the changes. My question is: Why would you think it is a good idea to remove some of those changes that were made?

Greg Medcraft -

Frankly, that is a little unfair because it was government policy. In the area of financial advisers, my own view is that we still regard the advice sector as one of the riskiest sectors that we regulate.

Frankly, part of the problem here is that you are not going to regulate a change in culture. A large part of the financial advice sector does a great job, but, at the end of the day, we need a financial advice sector that Australians can trust.

Sam Dastyari -

Wasn’t that why the FOFA changes were made?

Mark BISHOP -

Order!

Greg Medcraft -

May I finish? What we need is for the financial advice sector to win that confidence and trust from the Australian public. At the end of the day, regulation will exist, but what really has to happen is that that sector culturally has to change and win the trust and confidence of Australians.

It is really about changing their culture. It is not about sales; it is actually about giving real advice that people can trust.
FOFA made good progress, but I really think the issue there is that Australians can sort of feel – when we do surveys we find that as a sector they are not –the level of trust. All I do is appeal to the industry to work really hard to win the trust of Australians, because with superannuation we need a financial advice sector that we all can trust.

As an individual, I would like to be able to see a financial adviser that I do not have any concerns about. What we have seen over the last few years certainly does not contribute to that environment of trust and confidence.

To achieve that, they need to go way beyond meeting the law. They need to actually do what is needed to win the trust of Australians. That is what we need. It is the cornerstone of our system, especially with superannuation.

Sam Dastyari -

I agree with your sentiments. Wasn’t the entire point of the FOFA changes, as you understand it, to create a framework where there is firstly a cultural change within the financial service provider sector and secondly to give people – mums, dads and families – there are different levels of sophistication when it comes to investors.

With all due respect, Mr Medcraft, someone like yourself who has spent 30 years as an investment banker has a different level of expertise and confidence when it comes to investing.

Greg Medcraft -

And scepticism!

Sam Dastyari -

And scepticism – and understandably, if you have experience in that area. But is it fair to say that the point of FOFA... you said that you need cultural change as well as regulatory change – that was your argument.

The real objective is culture, not necessarily regulation. I put to you that the point of the regulatory change and the framework was to initiate a cultural change within the sector and that it was to give people and families confidence—that they know there are penalties and legal obligations for the person at the other end of the table, who is giving them financial advice, to be acting in their interests.

I am worried—and I think these are concerns you share—that if you dismantle that framework, firstly, you are sending the wrong message to the sector about the culture that is acceptable and, secondly, you are saying to mums and dads that they cannot have confidence in the financial advice they are being given.

I just urge you, in your private conversations to government – which I am sure you have and I am not going to ask you about advice to government, because that is the purview of government – that you raise those concerns. That is the position I put to you.

Greg Medcraft -

The overall point is that one in five Australians sees an adviser today. It probably should be one out of two Australians. So I think the sector should be thinking about this. It is not how you can divide up today’s 20 per cent pie, it is how you can divide a 50 per cent pie. I think the industry needs to be thinking long-term and going ‘How can we actually make this 50 per cent so that one out of two Australians sees an adviser?’ I think that is the challenge and it is a challenge we all have in this sector.

Sam Dastyari -

But it makes your job harder, does it not?

Greg Medcraft -

We try to do the best with what we have but I will say it really worries me, the financial advice sector. I would really appeal to them. They really have to try and grab that challenge and win that confidence. They really have to do it, because we really need it – with superannuation. We actually need it. We need advice we can trust.

David Bushby

I understand what you are saying, that Australians need to have a financial advice industry where they feel they can go and see their financial adviser and trust the advice they are going to get.

Greg Medcraft -

Like seeing their doctor or lawyer.

David Bushby

And how to achieve that were the issues that were canvassed by the Ripoll inquiry. There were a lot of submissions about how that could be done and in the end they made a set of recommendations. I do not think it was unanimous, but there was a set of recommendations and some recommendations by other members of the committee. The government then looked at the Ripoll inquiry and made decisions which included things that were not canvassed by or recommended by the Ripoll inquiry. Is that correct ?

Greg Medcraft -

Yes.

Peter Kell -

Agreed.

Sam Dastyari -

I believe the FOFA reforms included measures that were not recommended by Ripoll, but similarly, some of the measures recommended by Ripoll were not taken up by the government. What that highlights to me is that there is a range of options for how you actually try to foster a financial advice industry where Australians can feel they are going to get good advice. Some of those were trialled in the FOFA and some recommended by Ripoll were not taken up. But you mentioned yourself in your own recommendations there is an option for helping to do that. There is a range of options that we can try to implement in government which are not necessarily mutually exclusive to what is in FOFA. There are other ways of looking at this and how you can deal with it. You are nodding and saying that is correct.

Greg Medcraft -

Actually, I think industry very much welcomes the idea of, say, having a national register of all employer representatives. This is where they, as well, can benefit by tracing bad apples who are not doing a good job. I think that is a constructive proposal.

As well, there could be a national exam, so that if you see an adviser you know they have the same level or standard. It’s a bit like sitting an HSC. We know that it is at least a common, level playing field. So I think there are positive ways of improving people’s confidence in the standard and quality of advice.

David Bushby

If you had a system of registration… that would make that a lot simpler – it would simplify the process, wouldn’t it?

Peter Kell -

That is a very good point. At the moment, ASIC simply does not have the ability to track all the financial advisers that are in the industry – in particular employee advisers.

Our best guess is that there is somewhere in the order of 14,000-15,000 employee advisers out there, and we see those advisers occasionally moving around between firms. Having a register would allow us to understand who the advisers are, who they are working for, how often they are changing jobs and where they are working around the country. It would not only give us but also financial planning firms employing advisers a complete picture of the industry and who is moving where. It would also give consumers information. So, they would be able to see where their advisers have been and who they have been working for.

Mark BISHOP -

Mr Medcraft, thank you for your attendance this morning, and I thank all the officers from ASIC for their attendance and the advice they have been able to offer. As I said in my opening remarks, we will return on at least two further occasions and I suspect another lengthy occasion to go through some of this material in more detail. For members of the public who think the discussion might have been closed down, there is more to come yet.

Greg Medcraft -

Thank you, Chairman, and members of the committee and members of the public who have come along – and thank you for your submissions. All I can say is that we are listening and we are making changes.

Mark BISHOP -

Thank you, Mr Medcraft.

This article first appeared in the April 2014 issue of ifa magazine

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