FINSIA: The Regulators

Opening remarks by ASIC Deputy Chair Karen Chester at The Regulators 2019, Sydney, 15 November 2019

Being a FINSIA fan, I’m pleased to be here today. Joining Guy and John to form a troika for the panel discussion – three deputies, three regulators, and three economists. I’ll look to cover three things in my opening words:

  • first, do a bit of myth busting about ASIC,
  • second, identify the two elements that form the alloy across our regulatory priorities – being fairness and transparency, and
  • third, share a few insights from our recent report on disclosure, and why it’s time to do things differently.

First some myth busting

Turning first to some lunchtime myth busting.

Some commentators purport ASIC has undergone a pendulum swing to become an agency solely focused on enforcement. And with this, a mis-portrayal of our ‘Why not litigate?’ approach to enforcement. Some wrongly and persistently portraying it as litigate first. Nothing could be further from the regulatory logic or indeed the evidence.

On the regulatory logic, two points. First, the procedural discipline we impose on ourselves in asking and answering why not litigate in and of itself means that we will not take every matter to court.

Second, the literature and international experience tells us that to be effective in enforcement-based deterrence we need to be seen to be active in using all our regulatory toolkit. Thus to be effective in enforcement, we cannot be solely focussed on enforcement.

On the evidence here, let me highlight a few examples of our non-enforcement regulatory endeavour since the Royal Commission report (so over the last 9 months). Over the past 9 months, we have:

  • issued 29 reports, covering a range of topics – from consumer awareness and understanding of financial advice to a review of TPD insurance claims.
  • issued 17 consultation papers, from regulatory guidance on responsible lending to complaints handling (or internal dispute resolution) requirements to three proposed uses of our new product intervention power.
  • advanced our new strengthened supervisory initiative with our Close and Continuous Monitoring (CCM) program (at latest count 205 days onsite and 713 meetings with banking staff at all levels) and our Corporate Governance Taskforce (CGTF). The first tranche of findings we published in October.
  • On remediation, across just three streams (consumer credit insurance, add on insurance products in the car dealer distribution channel and fee for no service) we have collectively seen more than 1.2 million consumers remediated more than $660 million. [1]

Let me pause here – over 1.2 million real people remediated more than $660 million, their money. Not a regulatory burden, not a cost of doing business. And we know there is much more to be repaid.

Turning to our strategic priorities

Turning to what matters most to us in the coming years. We released our Corporate Plan two months ago. It identifies our seven strategic priorities for 2019-20. From addressing the Royal Commission’s recommendations and referrals to establishing ASIC as the primary conduct regulator for superannuation.

But importantly two elements form the alloy that solder together our seven priorities. They are the fairness imperative (for us and for the firms we regulate) and our use of transparency.

Now fairness is both a legal and ethical obligation for corporate Australia. And when we ask the question ‘what is fair?’ we know its absence when consumer harm abounds. Now some opine that in a post Hayne world, the fairness expectation has become more akin to the BBC announcer of Monty Python’s Flying Circus: “and now for something completely different”. When perhaps it’s simply not.

The fairness imperative is nothing new, we are just seeing a demonstrable restatement of it. First and foremost, doing ‘the right thing’ is a legal ‘must have’. Fairness is already embedded in the corporations’ law. The obligation for financial services licensees to act efficiently, honestly and fairly (s912A) has existed since it was introduced by the Financial Services Reform Act 2001.

And s912A is now front and centre on ASIC’s ‘why not litigate’ radar, as distinct to the enforceable undertaking territory of the past. And why? Before 13 March 2019 a breach of this provision would attract a penalty of zero. Today it attracts maximum civil penalties of up to $1.05 million for an individual, or up to $525 million for a corporation.

And the relevant jurisprudence heightens the fairness factor amongst the ‘legislative three’ – efficiently, honestly and fairly – suggesting it’s the outcome that matters most and need not always be read as a compound to be breached.

Fairness – doing the right thing – can and should be seen to create commercial value. Intangible assets such as reputation, IP and customer base today account for over 80 per cent of total corporate value as compared to under 20 per cent 40 years ago.[2] And doing the right thing – asking Commissioner Hayne’s ‘should we’ – especially in managing non-financial risks, is proving today more than ever before to be a commercial ‘must have’. Look no further than the current tally for remediation provisioning now well above $10 billion.

And this tally, provoked a sense of déjà vu. Recalling the Bank of England Governor (Mark Carney’s) estimate in 2017 that the total post GFC cost of misconduct for the banks globally was US$320 billion. So our interim tally of $10 billion plus, perhaps not out of step when adjusted for the size of our economy. Only out of step in terms of timing and more a mismanagement of non-financial risks.

Going forward we are planning to publish our work on what we think fairness in the provision of financial services and products should look like … and not look like.

Turning to transparency. We view transparency in two ways. First, the transparency we apply to ourselves – demonstrating our performance and showing the impact of our regulatory actions on market conduct. Second, and the one I want to expand on, is the transparency we bring to our regulated entities – using transparency as a regulatory tool. Sharing pertinent information and findings publicly allows firms to better understand our conduct expectations, drives improved industry behaviour, encourages more effective competition. Ultimately, to improve consumer outcomes.

We have more than elevated the use of transparency as an effective regulatory tool. Think of it as keeping the Michael Hodge QC ‘night light on.’ And our use of the tool should not be viewed as a regulatory burden. More a valuable insight into how they are faring and importantly how they are faring relative to their competitors.

Let me share a contemporary example of how we do this. On our strengthened supervisory approaches with our CCM (to date on complaints handling and breach reporting) and our CGTF, transparency takes two forms. First, providing frank and fearless (written) feedback to the leadership of corporates on our entity-specific findings. And second, reporting publicly on our observations and findings across the supervised cohort – outlining the ‘distribution’ of findings, pointing to both good and poor practices and some expectations on particular practices. Now importantly here the firms themselves (armed with their individual feedback) can then identify where they are in the distribution. And so can any board, by asking their management the questions we did of the supervised cohort.

We will be naming more names. Like we did recently in relation to TPD insurance claims and our first CGTF review.

But in identifying entities in our public reports, we will do so when it has regulatory value and purpose. So where the transparency in naming an entity advances a consumer protection or market integrity objective and there are no compelling countervailing factors to do so.

Other manifestations of transparency. We are working to improve publication of aggregated recurrent data and insights – the recent publication of life insurance claims and disputes data is just one prominent example, and one on which we collaborate with APRA.

And we will continue to use mechanisms, such as public hearings, that critically lend transparency, accountability and legitimacy. Like we did for the first time this year as an important part of our consultation on our responsible lending guidance. Indeed the facts and evidence gleaned from those public hearings informed not only the credibility we could attach to submissions and the development of our final guidance (which we will release next month); but it also helped our myth busting endeavour.

So it’s no accident that our Corporate Plan, in listing our to do list for the next 12 months, has more than 40 reports and reviews being published. Keeping the lights on. My top 4 (ASIC summer reading list):

  • Early 2020, the second report of our CGTF on board oversight of variable remuneration of key management personnel
  • A report on advice by superannuation funds, examining the advice services offered and testing the quality of that advice.
  • A review on how lenders are responding to consumers experiencing financial difficulty, and
  • A review of travel insurance distribution channels and assessing the outcomes for consumers, including product value.

The limitations of disclosure

On a final note, it’s time to call time on disclosure as the default ‘go to’ for consumer protection. Perhaps one of the fundamental shifts in regulatory policy, is the move to a world beyond disclosure. The evidence now unavoidably reveals that disclosure is not the ‘silver bullet’ it was once thought to be for consumer protection.

Our recent report, Disclosure: Why it shouldn’t be the default, prepared jointly with the Dutch Authority for the Financial Markets, draws on well-established (some 3 decades) of behavioural economics research alongside 10 years of case studies. It reveals that mandated disclosure and warnings have often failed to deliver intended consumer outcomes or even worse, have backfired, contributing to consumer harm. The 33 case studies cover a range of financial services and product, all forms of mandatory disclosure and warnings, and across 4 jurisdictions: Australia, the Netherlands, the US and the UK.

The report is a must read. For financial services firms wanting to better manage non financial risk, wanting to be consumer centric and wanting to meet their future design and distribution obligations.

Five key limits of disclosure are identified in the report, and supported by the case studies. First and foremost, disclosure does not ‘solve’ the complexity in financial services, especially when much of the complexity and frictions (or sludge) is firm induced.

But let me share just one of the 33 case studies illustrative of how disclosure can backfire in unexpected ways. It’s on the mandatory disclosure of conflict of interest in financial advice in the US. When conflicted advisers provided ‘bad advice’ and disclosed said conflict, 81% of consumers followed that bad advice. Yet only 53% of consumers followed the bad advice when the conflict was not disclosed. And why? The disclosure of the conflict backfired – it translated into a trust dividend for the adviser as opposed to the intended protection through consumer scepticism. A loyalty loss.

Personifying the adage ‘anything goes as long as you disclose’, an over reliance on disclosure in some ways proved an enabler of the poor conduct and poor consumer outcomes revealed by the Royal Commission. Commissioner Hayne recognised that disclosure in and of itself does not deliver fair outcomes for consumers. The final report represents more than a tilt away from disclosure, the overwhelming majority of the recommendations – some 55 of the 76 – are about better firm conduct.

Placing the onus on consumers to inform and protect themselves without also requiring firms to take responsibility for the design and distribution of their own products has not produced good consumer outcomes. It is time to rebalance – financial services firms need to share (with consumers) the responsibility for better consumer outcomes.

Our two new regulatory tools – product intervention power and design and distribution obligations – are tools that go beyond disclosure. The upcoming design and distribution obligations are a business game changer and should prove the legislative nudge to better prioritise consumer needs. And firms should view meeting these obligations as an investment in commercial value, not a regulatory burden. It’s also an insurance policy against a loss of commercial value – think the risk of remediation bills in the future, being PIPed by ASIC or for the industry a Royal Commission Mark II. For the one universal truth across all the Commission case studies – they would have scored a fail on design and distribution obligations.

We will release our draft guidance on DDO for consultation in the not too distant future, ideally by the end of this year. This follows: consultation on the legislation to implement DDO; ASIC also undertaking some targeted consultation in preparing the draft guidance; along with our close engagement with the UK FCA, where DDO-like obligations have been up and running for a number of years. 

And whilst the obligations do not take effect until 6 April 2021, their very nature requires firms to ensure they have the systems and processes in place by that date. So one question the boards of financial services firm ought ask their senior executives now. Are we getting ready for DDO? Do we have the data we need to ask and answer some fundamental business questions? Because that’s pretty much what DDO really entails. Do we know our target market for this product? Is this product of value and not of surprise value to that target market? Do our distribution controls, included our chosen distribution channels, mean it’s getting to our target market? Would we know if it wasn’t?

And the data will matter here. ASIC has recently identified where there was much room for improvement on the data and systems. From our CCM work on complaints handling. From our CGTF review of the oversight of non financial risk. From our recent TPD insurance review where we found critical absences of data – without which insurers cannot identify the value of their products to consumers. And could not identify the problem points in their claims handling.

Conclusion

In wrapping up, at ASIC we will, ‘keep the night light on’ both conduct and consumer outcomes. But at the end of the day firms must also commit to change. And the most demonstrable evidence of that in financial services will be when firms understand, measure and deliver on good consumer outcomes.



[1] In consumer credit insurance, more than $100 million paid to over 300,000 consumers. For sale of add-on insurance products in the car dealer distribution channel, we finalised over $130 million to over 245,000 consumers. And on fees-for-no-service, around $430 million for 718,000 consumers or consumer groups. And more to come given the latter represents less than a third of the $1.7 billion collectively provisioned by the banks for FFNS at 30 June.

[2] From the UK Financial Reporting Council’s July 2016 report ‘Corporate Culture and the role of Boards’.

Last updated: 15/11/2019 12:00