A speech by James Shipton, Chair, Australian Securities and Investments Commission at the Financial Services Council Summit 2018 (Melbourne, Australia), 26 July 2018. 

Good morning everyone and thank you to the FSC for inviting me to speak today.

Today, my remarks will focus on the trust deficit facing the financial sector - including the superannuation industry. Accordingly, I will outline my perspective on what I think all leaders in the financial sector need to do to address this deficit.

And in relation to superannuation, I will:

• highlight some of the conduct that we think has contributed to the trust deficit in your sector; and
• provide an update on ASIC’s work in superannuation,
• and explain how we will continue to enhance these regulatory efforts moving forward.

The Royal Commission

At the outset, I want to recognise the important work of the Royal Commission. The Royal Commission has highlighted, for the community, the costs and consequences of financial services misconduct. This is the very same misconduct that my colleagues at ASIC have been investigating and acting on for many years.

To this end, over the past seven years, ASIC’s regulatory enforcement outcomes have included:

• more than 160 criminal convictions,
• more than 140 civil proceedings and
• more than 150 court enforceable undertakings.

We have also:

• obtained over $1.8 billion compensation for consumers, much of this via court enforceable undertakings;
• banned more than 820 financial advisers or credit providers; and
• disqualified nearly 400 directors.

For ASIC, the Royal Commission hearings provide a great opportunity for the public to see directly the very same issues and concerns that ASIC has been working hard to address.

The Royal Commission also provides an opportunity for ASIC to reflect on its role as the principal conduct regulatory agency in the financial sector.

Our job at ASIC is to continually evolve and improve what we do to respond to the significant challenges confronting the financial industry. And so, we look forward to the recommendations that will come from the important work of the Royal Commission.

Returning to the issue of trust, the misconduct highlighted by the Royal Commission hearings is reflective of a trust deficit facing the financial services sector in Australia.

I have spoken before about how many people in finance have lost sight of the ultimate purpose of the financial system; they have, essentially, forgotten that:

• this system is all about managing other people’s money; and that
• finance serves a vital purpose for all Australians.

This is a message that applies equally to the superannuation, financial advice, investment management and insurance sectors.

So, let me be clear - I see those of you in these sectors:

• Firstly, as the custodians of other people’s money.
• Secondly, as entrusted with this money so that Australians can save and invest those savings as well as manage all kinds of risks.
• And, finally, in the case of compulsory superannuation, you hold other people’s money in a world where consumers have no choice but to entrust that money to you.

As a result, your responsibilities to your investors specifically, and the community more generally, are amplified – and rightly so. To be blunt, there has been too much focus in many parts of the superannuation sector on exploiting opportunities to make money from Australians instead of focussing on the responsibilities that come from being the custodians of other people’s money.

This must change.

The starting point for bridging this trust deficit is clear – there needs to be a wholesale realisation that:

• the superannuation industry is the custodian of other people’s money, and
• that the industry exists for both an economic and societal purpose - to provide a retirement platform for Australians.

Restoring the trust deficit

There has been a great deal of talk, indeed rhetoric, around the trust deficit and the cultural reforms needed in finance. Now is the time to move from rhetoric to reality.

So, what can the finance industry do to move to this better reality?

I want to share three suggestions:

First, there needs to be wholesale review of conflicts of interests in firms, sectors and markets to identify, manage and, if appropriate, remove every single conflict of interest.

As the Royal Commission hearings have highlighted, conflicts of interests have been the root cause of much of the identified misconduct. Conflicts in financial services are not new, and they certainly are not unique to Australia; nevertheless, it is clear to me that a number of institutions, and sectors, have not taken the management of conflicts of interests to heart.

In fact, there has been reluctance, and often times, resistance to addressing conflicts, especially those embedded in remuneration – even when ASIC has pointed them out.

This must change because conflicts of interest that are imbedded in remuneration become imbedded in corporate culture. With the result being that the culture is not one that will have the best interests of its customer in mind.

Moreover, as we all know, shifting these cultural norms is firstly a question of leadership. Accordingly, addressing conflicts of interests requires attention from the most senior leaders in finance.

And this brings me to the second thing the financial services industry can do to restore trust – there must be greater senior management attention to conduct issues that lead to poor consumer outcomes.

There needs to be more investment in management systems and processes to capture, diagnose and remediate conduct issues earlier, quicker and more efficiently. This includes the adoption of emerging regtech solutions.

In my observation, there has not been enough investment in these systems and processes to date. With the result that it takes far too long for management to meaningfully address conduct problems.

Breach reporting practices are just one example of this point.

Next month ASIC will release its review into breach reporting practices in 12 banking groups. One of the key findings from that project is that it took an average of over 1,500 days – that’s over 4 years – between an issue occurring and it being identified internally for investigation, which is only the first step in an often lengthy process before a significant breach is then reported to ASIC.

Remember, breach reporting to ASIC is a statutory requirement and a cornerstone of our regulatory architecture.

Accordingly, there is an urgent need for investment in systems, procedures and policies that better and more quickly identify emerging conduct and systemic issues so that they can not only be reported to us more quickly, but so that can be resolved more quickly.

Again, this will take commitment and attention by the senior-most leaders of financial firms.

Interestingly, ASIC has experienced a 30% increase in breach reports in the 2017-18 financial year. This suggests there is enhanced attention to these issues right now.

But there also needs to be supporting ‘industrialisation’ and ‘institutionalisation’ of these processes, to ensure management, and thus the institution itself, doesn’t fall back into bad habits.

The third initiative that I think industry leaders can pursue is to refresh – or if necessary, create – their strategy for dealing with regulators.

Based on my discussions with financial services leaders and their advisers, there often isn’t a coherent and consistent strategy for this. In fact, there does not appear to be a single example of a strategic plan that articulates the principles of engagement with regulatory agencies.

For an industry that prides itself on its strategic approach this has come as a great surprise.

This means that issues are dealt with in an ad-hoc, and at times, inconsistent way. This is especially so in larger and more diverse organisations.

What’s worse, as the Royal Commission hearings have highlighted, some of these dealings with regulators are totally unacceptable and arguably illegal. So, I want to encourage industry leaders to ask themselves if they have a clear strategy for engaging with ASIC and other regulators?

And importantly – are your actions consistent with your strategy? And is there appropriate accountability to ensure this happens?

I am not calling for another policy document with motherhood statements. Instead, there needs to be genuine change and genuine vision on how to be a responsible corporate citizen vis-à-vis regulatory agencies specifically, and the community more generally.

I want to emphasise that the industry needs to lean into these responses now. The practical reality is that all of these changes take time to implement. Accordingly, time is of the essence.

Now is the time to move from rhetoric to reality when it comes to rebuilding trust. There is a window of opportunity right now to leave a legacy that ensures the industry does not make the same mistakes again in the future.

The trust deficit in superannuation

Turning now, specifically, to superannuation.

I want to start by giving you some examples of the types of conduct that we think are contributing to the trust deficit in superannuation. This is behaviour that leads to unacceptably poor member outcomes in super, and it must stop if Australians are to have real trust in the superannuation system.

These examples are:

• The exploitation of consumer disengagement and consumers’ knowledge and decision biases – for example, processes by funds that make it unreasonably difficult for consumers to opt out of insurance.
• Failures to promote informed decision making – for example, misleading promotions that prioritise marketing over accurate disclosure of key terms.
• Poor financial advice about superannuation issues and options – for example, in relation to setting up a SMSF or switching superannuation products.
• Poor treatment of consumers in their interactions with the super system –for example,delays and difficult processes in insurance claims handling and general complaints handling.
• Practices that make it difficult for vulnerable consumers to access their super – for example, lndigenous Australians in remote areas whom are eligible to access superannuation benefits, but are unable, or whom have significant difficulty, in doing so.
• Defensiveness when it comes to transparency about fund operations – for example, a resistance to disclosing investment holdings. This is indefensible when, as I said before, it is other people’s money.

ASIC’s work in superannuation

Having identified the issues we have been dealing with, I now want to outline how we plan to respond.

Firstly, ASIC’s approach to superannuation is, and will be, guided by our recently revised vision statement that aims:

• for a fair, strong and efficient financial system for all Australians.
• To realise this vision we will use all our regulatory tools to:
  • change behaviours to drive good consumer and investor outcomes;
  • act against misconduct to maintain trust and integrity in the financial system;
  • promote the strong and innovative development of the financial system; and
  • help Australians to be in control of their financial lives.

This means our interest in superannuation is broad, touching many sectors and concerned with many issues, including those relating to trustees, financial advisers and distributors.

Moreover, superannuation trustees are some of our largest investors. And so, our work to promote market integrity and best corporate governance is highly relevant to the superannuation industry.

Today, I want to focus particularly on our extremely important work to promote good consumer and member outcomes in superannuation.

Again, our interest here is broad and covers financial advice, insurance, complaints handling, promotion activities, as well as disclosure and those conduct obligations that come with having a financial services license. So, we focus on member outcomes to minimise the harm from behaviour falling within our jurisdiction.

Consistent with this, let me take you through some of our recent work in relation to superannuation:

• RG 97. Earlier this week we released our external report - Regulatory Guide 97 Fees and costs disclosure prepared by industry expert Darren McShane. We welcome this report and as soon as we can we will release a consultation paper setting out ASIC’s proposed response to the issues raised in Mr McShane's report.
• As to enforcement actions in superannuation, some of our most recent actions include:
  • Court enforceable undertakings from CBA and ANZ relating to superannuation product distribution practices.
  • We also await judgement in our civil penalty proceedings against Westpac’s superannuation subsidiaries arising from their telephone campaigns targeting superannuation fund members.
  • And we also secured infringement notice penalties for false and misleading statements in marketing by superannuation trustee Tidswell and promoter Spaceship.

Given our important role regulating the distribution of superannuation products we will continue to monitor new superannuation industry entrants to ensure that marketing and promotional claims are consistent with the underlying features of the product.

In relation to our industry review work, this year we have released reports on SMSFs and financial advice issues in super.

For example:

• In Report 575 about SMSF advicewe highlighted that 91% of files reviewed did not comply with the applicable financial adviser obligations; and
• In Report 576 about member experiences with SMSFs, we reported that many self managed super investors did not fully understand what is involved with running a SMSF. Moreover, some were using the structure solely as a vehicle to get into the property market, without a wider investment strategy.
• Also, our Report 562 about financial advice in vertically integrated institutions and conflicts of interest, welooked at advice about superannuation platforms and will pursue remediation for customer losses resulting from poor advice about these products.

And there is more to come – we will shortly be releasing our Insurance in Super report, and we have further work on Employers and Super as well as in relation to Total and Permanent and Disablement Insurance. We are also planning a project looking at personal advice provided by superannuation funds.

On the policy front, we are doing substantial work to implement the Government’s important reforms in dispute resolution – an area where there is significant scope to improve outcomes in superannuation.

To this end, ASIC will consult with stakeholders about internal dispute resolution policy settings contained in our regulatory guide RG165, after the commencement of the Australian Financial Complaints Authority – AFCA - on 1 November 2018.

A key focus of this consultation will be the maximum internal dispute resolution timeframes, and how and when the current 90 day resolution deadline should be reduced.

Accordingly, now is a good opportunity to get ahead of the changes that will come in relation to internal dispute resolution reform - by reviewing your complaints handling practices to ensure they are providing timely resolutions for consumers.

In addition to this already full agenda of superannuation work, we are continually looking for ways to evolve and enhance our regulatory approaches.

We are currently looking to deliver an enhanced supervisory approach for superannuation and have already strengthened our team focused on this area.

Our planned enhanced supervisory approach will:

• use a range of supervisory techniques, including more frequent on-site visits;
• build on our already significant public actions in the superannuation sector, including more enforcement outcomes; and
• better leveraging the data currently available to ASIC, and APRA. We will also make use of new data sources, including internal dispute resolution data that must be reported to ASIC, as well as data on life insurance claims coming from joint ASIC and APRA work.

We will also increase our focus on the consumer perspective through the incorporation of more consumer testing and shadow shopping.

Our strengthened superannuation team will also move towards a more intensive engagement model, where superannuation stakeholders will deal with specific ASIC staff on a more consistent and regular basis.

By building on our existing work in this way, we plan to heighten the intensity of our regulatory scrutiny in superannuation.

I also want to recognise that we are not the only ones regulating the superannuation sector. ASIC, APRA and the ATO all have a common interest in this area. Accordingly, you can expect our approach to continue to build on and enhance our close working relationship with these agencies.

This common interest also necessarily means there are boundaries to ASIC’s jurisdiction in super, and some issues will be in the remit of other regulators.

Nevertheless, we plan to do everything within our powers to improve member outcomes in superannuation.

Finally, all of this is happening alongside various other important developments in superannuation. For example:

• the Productivity Commission’s report on the competitiveness and efficiency of the super system,
• the implementation of the Insurance in Superannuation Voluntary Code of Practice; and
• the Government’s announced Protecting Your Super reform package.

Conclusion

In closing, I want to challenge the FSC membership, and all those in the financial services and superannuation industry, to rise to the challenges that the trust deficit presents.

And don’t get me wrong – this is a time for more than just review and reflection.

Now is the time for action.

Now is a time to move from rhetoric to reality.

Thank you, and let’s get on with it!