ASIC update at the Financial Services Council member webinar
Speech by ASIC Deputy Chair Karen Chester at the Financial Services Council member webinar, Thursday 16 June 2022.
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Good morning everyone.
Thank you to the Financial Services Council for the opportunity to speak with you today.
I would like to begin by acknowledging the Traditional Owners’ ongoing connection to and custodianship of the many lands on which we virtually meet today, for me the Gadigal people of the Eora Nation, and to pay my respects to their Elders past, present and emerging. I extend that respect to Aboriginal and Torres Strait Islander people present today.
Today we find ourselves in the third year of much global uncertainty.
Significant change abounds in both our economic and geopolitical landscapes. Economic indicators have moved and continue to move dramatically.
Energy and consumer prices are rising globally. Annual inflation in the US has now reached a 40-year high of 8.6%. While Australian annual CPI rose to 5.1% in the March quarter. Disruptions abound – 37% of Australian companies reported international and domestic supply chain delays in February this year.
But perhaps the most enduring, fundamental change in global markets is the impact of climate change. Sustainability, including managing climate risk, is today widely acknowledged as a key driver of enterprise value. Climate risk is a critical investment risk to manage, and corporate performance is and will be increasingly assessed accordingly.
As BlackRock CEO Larry Fink heralded back in 2020, in his Annual Letter to CEOs: ‘Climate change has become a defining factor in companies’ long-term prospects. … and I believe we are on the edge of a fundamental reshaping of finance’. And more candidly in his 2022 Annual Letter, rejecting the notion that this is about politics, or is a social or ideological agenda, or is ‘woke’.
Sustainability issues – including climate change – are transformational for markets, finance, and the economy. So, they are front of mind for ASIC.
For ASIC, the endgame remains good investor and consumer outcomes. And perhaps there is a modicum of parallel here between managing climate risk and managing conduct risk.
We know too well from recent history that poor conduct has serious financial implications for companies, investors, and customers. With non-financial (conduct) risks crystalising into very real financial risks – not to mention the costly lag and drag of remediation and reputational damage. Our endgame seems on the money.
Against that background, I will talk to you today about two things:
- Sustainability and climate change
- Consumer outcomes.
Sustainability and climate change
Climate change, and the response of government, business, and community to it, is a transformational issue for the economy, markets, finance and ultimately wellbeing. It intersects with a number of core statutory objectives for ASIC: One, fair and efficient markets. Two, confident and informed investors. And three, maintaining, facilitating, and improving the performance of the financial system.
The core thread for ASIC, the one that matters most, is for markets and investors to have trust, confidence and ultimately comparability through disclosure. And initiatives to secure a global baseline for disclosure will matter much here, especially for Australia.
As regulators, we are seeing climate and sustainability themes play out in a number of ways.
Firstly, managed funds and super funds are changing their product offerings. In our region alone, sustainable labelled investments more than doubled between 2019 and 2021; while globally, ESG assets are projected to exceed US$53 trillion by 2025 and represent more than a third of total assets under management.
This week we issued an Info Sheet (INFO 271) to help product issuers avoid greenwashing, or overstating their ‘green’ credentials.
Our information sheet is simply about helping issuers comply with their existing regulatory obligations (such as those contained in RG 65 on sustainability-related PDS disclosure, RG 168 on general PDS requirements and RG 234 on good practice guidance when advertising financial products). In doing so, we want issuers to use clear labels, define the sustainability terminology they use, and clearly explain how sustainability considerations are factored into their investment strategy.
We set out nine important questions for issuers to ask themselves, such as:
- Is the product true to label?
- For example, a fund labelled ‘No Gambling Fund’ may be engaging in greenwashing if the terms allow it to 'invest in companies that earn less than 30% of their total revenue from gambling activities'.
- Have you used vague terminology?
- Are your headline claims potentially misleading?
- Have you explained your investment screening criteria?
- Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
- For example, an issuer who prominently states on its website that it is committed to reaching net zero carbon emissions will have failed to provide adequate information if it does not also state how and when it expects to achieve this target.
These questions are all about truth in promotion and clarity in communication. A must-have for investor confidence and trust. We would hope and expect issuers to review their practices against our info sheet.
We will also continue to monitor the market, looking for misleading claims about sustainability; and we are encouraging investors to ask questions of issuers.
Secondly – and a critically important international development for corporate disclosure – is the recently established International Sustainability Standards Board (ISSB). The ISSB has moved with real pace. It is currently consulting on baseline global climate and sustainability disclosure standards to support the information needs of investors. We are encouraging Australian stakeholders to participate in that consultation process. We are also engaging domestically on the potential Australian implications of the proposed standards. And working internationally with peer regulators and IOSCO to have input to the ISSB’s consultation on the proposed global disclosure baseline.
Several jurisdictions have already taken steps to mandate climate disclosure, including the US, UK and New Zealand. Disclosure of climate-related issues is fundamental to investor confidence. Investors are demanding useful, consistent, and comparable information, so that the physical and transitional risks of climate change can be priced, and capital allocated efficiently.
We want to make sure Australian companies keep up with international standards for climate disclosure. ASIC wants to see continued improvement in sustainability and climate change disclosure practices; in particular that they comply with the law (as it evolves) and are decision-useful for investors.
We have for a number of years encouraged listed companies in Australia to continue reporting voluntarily under the Task Force on Climate-Related Financial Disclosures (TCFD) framework. So as the ISSB standards develop – companies will be better placed to transition to any future global standard applied in Australia.
We have recently wrapped up another review of TCFD climate-related disclosures by our larger listed companies. Overall, the signs are positive; we observed continued improvement in the standard of governance and disclosure.
But we do continue to see a lack of consistency, comparability, and structure to the reporting, across the market as a whole. There remains a lack of consistency in the scenarios applied and timescales adopted in relation to climate resilience or scenario analysis disclosure. All of this compromises the utility of the information for investors.
We are also seeing a proliferation of climate and decarbonisation targets announced by companies in the ASX 200. When formulating disclosures of this nature, officers and advisors of listed companies should consider recent TCFD guidance on Metrics, Targets and Transition plans, and their key obligations under the Corporations Act – including continuous disclosure.
However, it is clear that the developments I alluded to earlier will see the bar raised higher as we move ahead, so it is a work in progress. We will continue to encourage our regulated entities to get on the front foot and engage on this emerging area.
Preventing consumer harms
Last October brought more than a step-change in regulatory obligations for all of you; and exhausting no doubt for most. The implementation task cannot be overstated. But perhaps that step-change has also provided you with the ‘guard rails’ to manage conduct risk and deliver good consumer outcomes.
For these changes – and in particular the big three: DDO, IDR and better breach reporting – are an investment. Operating within those guardrails (good systems, good processes, good controls, good transparency) will ultimately be good for your customers and your business. Importantly, and ultimately, firm performance operating within those guard rails will become transparent across firms over time.
Design and distribution obligations
Turning first to DDO. A robust DDO framework embeds consumer-centric product design into your business. It enables you to better design your products before you market them, refine them over time and place less onus on disclosure to mitigate consumer harms.
Timely, then, for a sense of what we are seeing so far in relation to DDO compliance, and a sense of ASIC’s expectations going forward.
At the get-go, our work included helping Treasury implement amendments to the regime, to iron out some issues that industry had identified. For example, those amendments included the removal of the ‘nil complaints’ requirement, which I know was a key concern for FSC members.
As you know ASIC also provided feedback on template TMDs. While we didn’t take on an ‘approval’ role, our feedback saw various improvements to final templates. The template TMDs have been a good resource for issuers, and have contributed to a more consistent approach to implementation. This has had a number of benefits, including helping distributors more easily navigate TMDs from multiple issuers to understand their obligations.
Importantly, templates are of course only a starting point – each issuer must adapt them to their individual products and distribution, and make sure there are appropriate product governance arrangements in place to support them. We expect to see them evolve.
Consistent with our reasonable approach in the early stages of implementation, we focused on areas where we had seen poor outcomes or consumer harms in the past – this included engagement with the credit sector, identifying where TMDs were not publicly available, and reviewing those publicly available, with particular attention paid to small credit providers, credit cards and buy now pay later products. We identified shortcomings in some of the approaches, and engaged with entities directly to improve compliance.
We have also:
- focused on early disruption of poor conduct by providers that we identified as having a higher risk of non-compliance, due to their past conduct;
- engaged with issuers of complex or higher risk products, including OTC derivatives and crypto products; and
- reviewed TMDs and approaches to compliance by issuers of products undertaking initial public offerings, including hybrid issuers, listed investment companies and other securities with an investment purpose.
Moving now to some observations about DDO compliance.
Our early TMD reviews, as I think some of you know, highlighted some disappointing approaches. For example, we found TMDs that:
- did not take into account key attributes of a product that would likely make it unsuitable for some consumers, such as its level of risk, high annual fees and high interest rates;
- defined the target market by focusing solely on consumer preferences or the intended use of a product, without considering more objective factors such as the financial situation of consumers, their risk profile and ability to bear loss;
- did not contain distribution conditions that would appropriately restrict the distribution of the product to consumers in the target market; and
- contained boiler-plate review triggers, rather than review triggers that are product specific and risk specific to appropriate consumer outcomes.
We also saw examples of TMDs for historically poor value or harmful products, that did not properly identify target markets or stipulate appropriate review triggers; and TMDs that in essence read like marketing documents rather than meaningful guidelines for product distribution.
However, we have also seen some encouraging approaches. For example, one issuer approached their TMDs by undertaking a comprehensive analysis of possible consumer attributes to establish various ‘cohorts’. It then assessed these consumer attributes against the key attributes of its products, when defining its target markets. This resulted in clearer, and much more objective, target markets for its products, which flowed through to similarly clear and tangible arrangements for distribution.
Of course, DDO is not all about TMDs. Firms must also have robust and effective product governance arrangements in place to operationalise what is set out in their TMDs, and to comply with other DDO requirements such as the review and significant dealing reporting requirements.
Adopting these robust product governance arrangements will support compliance with the regime. Ultimately, this means firms assessing data and ensuring they are properly able to monitor and understand the outcomes of their products.
We have seen some evidence of this broader work during early-stage implementation. In particular, firms considering their overall product offerings and making changes to their product suite, or who certain products are targeted towards. We expect this work to advance and accelerate as industry gains the benefit of the ongoing data stream on consumer outcomes from DDO. Where problems are identified along the way, industry will need to consider whether they need to change the design of their products and how they are being sold.
Turning to ASIC's approach going forward.
Firstly, we think industry has now had sufficient time to bed down its implementation of DDO, and so we are now expecting compliance with the obligations. This sees us now pursuing a targeted risk-based surveillance approach to DDO. We are examining compliance by both issuers and distributors, and have several matters in the pipeline for potential enforcement action. We are looking at defective TMDs as well as product issuers who have not made TMDs, or not made them publicly available.
Where we identify good practices, we will highlight them. Where we find non-compliance, we will now use our full regulatory toolkit, including court-based enforcement action, disruption, and using the DDO stop order power.
Turning now to breach reporting reforms, which also took effect late last year.
These reforms deal squarely with longstanding concerns about inconsistent, inadequate, and delayed reporting of breaches by licensees. The new obligations require more comprehensive, more timely and ideally more useful reporting.
It’s important we do not forget the Financial Services Royal Commission genesis of these changes. Commissioner Hayne found that the ‘unwillingness to recognise and to accept responsibility for misconduct explains the prolonged and repeated failures by large entities to make breach reports required by the law’.
Informing this were ASIC-highlighted deficiencies (in REP 594, released in 2018) such as firms taking on average over four years to identify incidents later determined to be significant breaches; and on average 150 days from starting an investigation to lodging a breach report. These reforms are designed to address those failures.
Importantly, the new regime is broader, more ambitious, and more complex than the previous obligations. Implementation will take time. By us all. But if firms can identify problems early, perform root-cause analysis and nip any issues in the bud, that will prevent significant consumer harm and remediation costs down the line.
The new obligations have real potential to provide much greater transparency. They were designed to improve the regulatory intelligence for firms themselves, but also that available to ASIC.
Positively, we have seen firms use the reforms as an opportunity to re-engineer their incident and event management processes, to improve how they manage issues. Some firms have improved how they identify systemic issues, and how they internally report and track the investigation, rectification, and remediation of these issues. These sorts of changes can create real time and enduring benefits for customers. Some firms have also told us they’ve already seen the impact of these reforms in their business, including in contributing to a better culture around root cause analysis.
We acknowledge that concerns have been raised with Government about certain aspects of the legislative settings that underpin the new regime. We are supporting Treasury as they consider those issues; acknowledging that policy settings are ultimately for Government.
Our focus is on practical implementation, and on working with industry to find and employ common sense solutions to any issues that arise. And on that front, we have a way to go.
There are some different practices and interpretations currently being adopted across industry in relation to the new regime – this is not unusual, as reforms of this nature take time to bed down. We will be mindful of this when deciding what information to publish later this year. Ultimately our publication must be useful to readers, based on consistent reporting, and provide meaningful transparency about industry’s experiences in identifying and responding to breaches.
For these reasons, we will be reasonably cautious with the data we initially report publicly. We are still working through the approach we’re going to take. We expect that our approach will evolve over time, as the regime is bedded down.
To get the full benefits of the regime, especially meaningful transparency, we need a consistent approach to what people are reporting. So our key priority now is improving the consistency and quality of the reports we receive.
To that end, when we shortly speak to stakeholders, we will be talking about current practices and our expectations, to help secure the consistency we’re looking for. This engagement could lead to improvements to our guidance, and to the form on the Regulatory Portal.
Internal dispute resolution
Turning to the updated internal dispute resolution data reporting framework.
We released the IDR data reporting handbook in March this year, and will begin consultation shortly on our approach to publishing the IDR data.
Along with breach reports, IDR data gives you early warning signs that can help you detect and act on problems, identify early patterns of misconduct and ultimately avoid remediation and reputational damage.
The IDR framework is the culmination of many years of work with industry to record, improve and standardise the quality of IDR data. Our collection and ultimate publication of system-wide IDR data will be a significant consumer-centric milestone and an opportunity for firms to assess their relative complaints experience and performance against their peers.
A seemingly obvious, but essential reform necessary to support IDR reporting (that came into effect in October 2021) was the requirement that firms record all complaints they receive. This is now an enforceable requirement (under RG 271), and our deep dive experience in 2019/20 showed that this was a challenge for even the largest firms with established complaints teams.
Improved recording capability helps firms identify and address systemic issues that arise from complaints. It also supports improved internal risk reporting. Publication of IDR data, which will begin in a staged way next year, will give increased public visibility of where harms may be occurring, across the financial system and down to the firm level.
Ultimately, if you combine the new IDR requirements with existing requirements for external dispute resolution and the new breach reporting data, you’ll have a full 360-degree consumer data dashboard.
Product labelling and advertising
Turning finally to misleading labelling and advertising.
We have work under way on the next phase of our 2020 ‘True to Label’ initiative, which examined whether managed fund labels misled consumers about the funds’ characteristics and underlying assets. That work found confusing and inappropriate product labels across 14 cash funds with under $7 billion in assets, as well as a significant mismatch between redemption features and liquidity of underlying assets in three funds with under $1 billion in assets. A number of responsible entities took corrective action. We also took enforcement action against fund managers for misleading or false advertising – and here I’ll highlight ASIC’s Federal Court wins against Mayfair 101 and Mr Mawhinney.
The Mayfair case illustrated that the financial and reputational risks attached to misleading and deceptive marketing are very real; and that it doesn’t matter what medium is used to misleadingly promote products, including use of search-engine advertising and sponsored links.
Over the last few months, we’ve met regularly with digital platforms including Google, to discuss advertising of financial products. And so we welcome Google’s initiative, announced last week, to implement a new advertising policy that will require advertisers who want to promote financial products and services in Australia to demonstrate they are licensed by ASIC.
In essence Google will expand to more markets the verification process that it put in place in the UK last year, via the FCA – and Australia, Singapore and Taiwan are the first additional jurisdictions where the new policy will be enforced from 30 August. Financial services advertisers in Australia will need to demonstrate that they are authorised by ASIC, and have completed Google’s verification program, in order to begin promoting their products.
Returning to our current work, we are now looking at managed fund advertising across both traditional and digital media, including social media, focusing on risk and return. We’ve found various examples of problematic marketing, including:
- promotion of implausibly high or reliable returns for the fund’s strategy,
- no mention of risks, or downplaying of risks,
- misleading comparisons to lower-risk products, and
- inappropriate benchmarks to suggest superior performance.
We are reviewing what we have found, and expect to announce a range of regulatory outcomes in the coming months. In the meantime, our message remains, as set out in RG 234, that promoters must take care to ensure that marketing gives balanced messages, risk disclosure is clear and prominent, and the safety and reliability of an investment is not overstated.
On a final note, as I’ve said, for ASIC the endgame is good consumer and investor outcomes; and both more than ever make good business sense.
Your newly invested ‘guard rails’ are now there to be well used.
Being consumer- and investor-centric, and investing in data and systems, is simply good risk management. And the common thread of greater transparency for managing both conduct risk and climate risk will perhaps prove the great equaliser for firms and markets.