Market Supervison Update Issue 57

Conduct risk

Conduct risk is the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees. Such conduct can be caused by deliberate actions or may be inadvertent and caused by inadequacies in an organisation’s practices, frameworks or education programs. Conduct risk can have significant ramifications for an organisation, its shareholders, clients, customers, counter-parties and the financial services industry.

In 2014, ASIC surveyed 21 investment banks operating in Australia (covering the major Australian, European, US and Asian banks) about their appetite, attitude and approach to conduct risk. The results of this survey form the basis of our ‘3 C’s message on conduct risk’:


  • Communication of conduct expectations needs to be clear, concise, proactive and regularly reiterated across all levels of the organisation, to ensure it is ‘front of mind’.
  • Organisations’ communication strategies should identify meaningful bottom-up validation to ensure the message is embedded (i.e. the message is clear, concise and effective).
  • Messaging needs to be linked to the importance of the reputation of the individual, organisation and broader financial markets.


Organisations should:

  • challenge existing practices to determine whether current conduct and behaviours are appropriate, and
  • foster an environment where employees are encouraged to escalate concerns and consider rewarding staff for speaking up.


  • There is a danger in thinking that because something hasn’t happened yet, it won’t happen.
  • Conduct risk should be continually reviewed, enforced and validated the same way as other key risks are (such as market, credit, liquidity and operational risks).
  • Conduct risk is avoidable! It is every organisation’s responsibility to provide frameworks to empower their employees to recognise, prevent, escalate and respond to conduct risks.

In late February 2015, ASIC provided our Conduct Risk Calculator to 19 investment banks. Their responses will be collated, and by the end of April an industry average will be sent back to each contributor to enable them to benchmark their awareness of and arrangements for managing conduct risk.

ASIC continues to engage with industry and overseas regulators in relation to conduct risk. On an ongoing basis, we present to investment banks’ executive committees, senior business leader forums and town halls about this issue. ASIC has also presented our observations to the Australian Financial Markets Association’s Board.

Market supervision report published

ASIC has published its ninth report on the supervision and surveillance of Australian financial markets and market participants. Report 425 ASIC supervision of markets and participants: July to December 2014 (REP 425) highlights key outcomes from ASIC’s Market and Participant Supervision and Market Integrity Enforcement teams.

The report highlights ASIC’s direct engagement with Market Participants to address concerns about market conduct. For example, using the improved functionality of ASIC’s new market surveillance system, Market Analysis and Intelligence (MAI), a persistent pinging strategy was identified in an ASX20 security trading in ASX Centre Point and Chi-X hidden public dark venues. Pinging is the practice of using the placement of very small orders to test if there is liquidity. Following intervention by ASIC, that behaviour has now ceased.

Between July and December 2014, discussions with market participants led to the amendment of order execution methods and the review of trading algorithms on 26 occasions. ASIC Commissioner Cathie Armour said that such examples highlighted the importance of and the manner in which ASIC was achieving positive behavioural change.

‘While enforcement outcomes are important from a deterrence perspective and send a message to industry that market misconduct will not be tolerated, ASIC’s early engagement with participants about inappropriate conduct or poor compliance is crucial to maintaining market integrity,’ Commissioner Armour said.

REP 425 outlines future areas of focus for ASIC, in particular the Market Entity Compliance System (MECS), which will enhance the way market participants and operators interact with ASIC. Other work being conducted by ASIC in the coming six-months includes a review of crossing systems which will assess how crossing system operators are meeting their regulatory obligations, targeted compliance reviews of client money obligations, and further analysis of the handling of confidential information.

ASIC’s use of behavioural economics

ASIC has released two reports on behavioural economics research experiments conducted as part of its push to better understand market and consumer behaviour.

The behavioural experiments were conducted by the Queensland Behavioural Economics group (QuBE) to explore:

  • possible behavioural ‘biases’ impacting consumer decisions about investing in hybrid securities rather than bonds or shares [a hybrid security is one that looks like debt but has the risk characteristics of equity], and
  • how to improve ASIC’s communication with directors of firms in liquidation to increase their compliance with the law.

Report 427 Investing in hybrid securities: Explanations based on behavioural economics (REP 427) provides insight into people’s decision making when investing in hybrid securities rather than in bonds and shares. In the experiment, QuBE found participants who were subject to an ‘illusion of control’ or ‘overconfidence’ bias relatively increased their hybrid allocation in a mock portfolio.

This research complements ASIC’s work on understanding how hybrids are sold to investors and increasing investor education about hybrid risk. The findings are also consistent with earlier research showing a desire for control is a strong driver among self-managed superannuation fund (SMSF) investors when deciding to set up and manage their own super fund. About two-thirds of Australian hybrid investors are SMSF investors.

Behavioural economic insights can also be used to help ASIC’s communication by presenting information in a way people can process more easily. Report 428 Improving communication with directors of firms in liquidation (REP 428) suggests even small alterations to communication, such as the order of messages in a letter to directors of companies in liquidation, can increase compliance. The report highlights there are likely to be two types of directors who fail to comply: those wishing to comply but who are overwhelmed and those who are intentionally non-compliant. It identifies opportunities to increase compliance through targeted ‘nudges’ and help for those wishing to comply.

Cyber resilience report published

ASIC has published Report 429 Cyber resilience: Health Check (REP 429) to help its regulated population improve cyber resilience. Cyber resilience is an organisation’s ability to prepare, respond, adapt and recover from a cyber attack.

Report 429 highlights the importance of cyber resilience to ASIC’s regulated population, to support investor and financial consumer trust and confidence and ensure markets are fair, orderly and transparent.

ASIC Chairman Greg Medcraft said, ‘Cyber attacks are a major risk for ASIC’s regulated population and that means cyber resilience is an area of ASIC focus. The electronic linkages within the financial system mean the impact of a cyber-attack can spread quickly – potentially affecting the integrity and efficiency of global markets, and trust and confidence in the financial system.

REP 429 outlines some ‘health check prompts’ to help businesses review their cyber resilience – including flagging relevant legal and compliance requirements, particularly on risk management and disclosure.

‘We encourage businesses, particularly where their exposure to a cyber attack may have a significant impact on financial consumers and investors or market integrity, to consider using the United States’ NIST Cybersecurity Framework to manage their cyber risks or stocktake their risk management practices,’ Mr Medcraft said.

Enforcement outcomes

Two men sentenced in Australia’s largest insider trading case*

Two men were sentenced to jail terms of 7 years and 3 months and 3 years and 3 months, respectively, in the Victorian Supreme Court for their roles in Australia’s largest insider trading scheme totaling $7 million. The two men were charged in 2014 with insider trading, money laundering and abuse of public office offences.

This large and complex investigation by the Australian Federal Police (AFP) and Australian Securities and Investments Commission (ASIC) began after suspicious trading was identified in the foreign derivatives market.

The AFP and ASIC, working together through the AFP-led Fraud and Anti-Corruption Centre, discovered an employee of the National Australia Bank was receiving sensitive information from an employee of the Australian Bureau of Statistics. They were then using this information to enter into foreign exchange derivative products and profit from favourable movements in market prices.

The nine-month illegal trading activity resulted in profits of approximately $7 million dollars, which was restrained by the AFP-led Criminal Assets Confiscation Taskforce. This money has now been officially forfeited to the Commonwealth and is to be placed into the Confiscated Assets Account, from where it will be reinvested into the community.

Today’s sentence is testament to the close working relationship between the AFP and ASIC, and the dedication and expertise of the specialised teams involved.

* Source Joint media release with The Hon Josh Frydenberg, Assistant Treasurer and The Hon Kelly O’Dwyer, Parliamentary Secretary to the Treasurer

ASIC bans Perth financial adviser for life

ASIC has permanently banned Lewis Fellowes, former financial adviser, from providing financial services. Mr Fellowes was banned after ASIC found he had engaged in dishonest conduct and in misleading or deceptive conduct in relation to six clients over the July 2008 to July 2010 period.

Mr Fellowes transferred more than $480,000 of client funds from their margin lending accounts into his personal account and that of his wife without the knowledge or authorisation of those clients. Mr Fellowes also transferred $1,000,000 from a client’s bank account to his own.

Mr Fellowes provided financial advice from 1995 until 2009 in Gladstone, Queensland. In 2010 he moved to Perth and continued to provide financial services. Based on his conduct in relation to the six clients, ASIC found that Mr Fellowes is not of good fame and character within the meaning of section 920A(1)(d) of the Corporations Act.

ASIC’s investigation into Mr Fellowes followed a voluntary report submitted to ASIC by Patersons Securities Limited which suggested that Mr Fellowes had engaged in misconduct beginning at his former role at Tolhurst Ltd in Gladstone. Following a merger with Tolhurst in 2009, Mr Fellowes was the Branch Manager of Patersons Gladstone. He then took on the role of WA Manager of Retail Operations for Patersons when he moved to Perth in 2010. Mr Fellowes subsequently returned the funds to his former clients.

ASIC suspends licence of wholesale service provider

ASIC has suspended the Australian Financial Services (AFS) Licence of Dunfo Capital Pty Ltd (formerly GSM Financial Group Pty Ltd) for failing to comply with a number of key obligations as a licensee.

Dunfo Capital was authorised under its AFS Licence to provide services including the operation of unregistered managed investment schemes and the provision of custodial or depository services to wholesale clients.

ASIC was concerned that Dunfo Capital:

  • failed to lodge financial statements and auditor report for the financial year ended 30 June 2014 within the required timeframe
  • failed to meet its Net Tangible Assets requirements
  • failed to maintain the competence to provide financial services
  • failed to comply with the key person condition on its AFS Licence
  • did not advise ASIC of the above breaches within 10 business days

Dunfo Capital’s AFS Licence was suspended until 31 August 2015. The suspension of the AFS Licence is part of ASIC’s ongoing efforts to improve standards across the financial services industry, including, the conduct of licensees that provide financial services to wholesale clients.

Last updated: 23/03/2016 03:08