Getting on with it


Keynote address by Karen Chester, Acting Chair, ASIC at the AFR Banking & Wealth Summit, Wednesday 18 November 2020.

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Good morning.

Let me begin by acknowledging the Traditional Owners of the many lands upon which we gather today, and for me the peoples of the Kulin Nation, and pay my respects to Elders past, present and emerging.

My thanks to the AFR for the invitation to speak today. Like many of you, my day begins with the AFR. These days, my AFR read needs to follow an early six-kilometre run and a very strong cup of tea.

I would also like to acknowledge the professional endeavour of the high-calibre stable of AFR journalists. It’s been a canter-paced year. In particular, congratulations to the business journalists for their 2020 journalistic awards – due recognition for their tenacious, investigative reporting. Some of the entities subject to their reporting have also been subject to our attention and endeavour. For ASIC, this reporting not only supports informed and transparent markets; it also enhances the deterrence value of our regulatory work.

I join you today ahead of our appearance before the Parliamentary Joint Committee on Corporations and Financial Services.

Last month the ASIC Commission accepted responsibility for failings of process and governance recently identified by the Australian Auditor General in finalising ASIC’s year-end financial statements.

We stand ready to answer PJC questions today, as we have done in no less than two recent hearing appearances. Doing so fully and transparently is fundamental to our accountability to the Parliament and ultimately the Australian people.

In response to the Auditor General’s findings, ASIC fully supports the independent review being undertaken by Treasury under the lead of Dr Vivienne Thom. We will be informed by and act upon its findings and make the changes needed so this history is just that, a past not to be repeated.

We also look forward to the PJC questions across the breadth of our regulatory work. At this time of disruption and uncertainty our work more than ever needs to be effective. And we need to be held to account.

And ASIC will be subject to further accountability in the future. The proposed establishment of the Financial Regulator Assessment Authority will inform the Treasury and Treasurer in real time and ultimately the Parliament about our regulatory efficiency and effectiveness.

In the annals of history, 2020 will perhaps be epitomised by the word ‘uncertainties’. Note the plural. For 2020 is an unprecedented year.

Beyond the depths of Australia reaching its all-time low on the OECD leader board in 1987. Beyond the market volatility and financial disruption of the GFC.

For with 2020 we face an unprecedented trifecta of shocks. To the real economy, to the nation’s health, to our social wellbeing. And with it unprecedented uncertainty across all three.

The annals of history also reveal that during times of uncertainty and disruption, new ways of doing things can emerge. In 2020 this has been true for government, for business, for consumers and even for regulators.

We are not alone in a world of ‘new normal’ for public institutions. Our colleagues at the RBA, APRA, Treasury and the ACCC have also embarked on new ways of getting on with it in this time of great uncertainty. Treasury Secretary, Steven Kennedy, recently spoke of Treasury’s new approach to framing and implementing fiscal policy for these times. The RBA Governor, Phil Lowe, spoke of the Bank’s new approach to implementing monetary policy. And from my experience, the Council of Financial Regulators has been collectively working with a greater collective synchronicity of awareness, understanding and action.

At ASIC we recognise that this is a time of a potential ‘new better’ for regulators and for business – where boards step in early and step up decisively to manage both financial and non-financial risk.

And with that ‘step in and step up’ by business, ASIC can step back. To only intervene when the data (early warning signs) of harm and misconduct require us to do so.

We need to support the economy, promote market integrity and efficient and competitive markets. We need to protect consumers – be they individual consumers, be they vulnerable, be they retail investors, be they wholesale investors, be they small business.

Our governing legislation states this clearly.

ASIC is also given specific functions under a wide range of legislation. But one of our broadest functions, conferred under the ASIC Act, is to monitor and promote market integrity and consumer protection in relation to the Australian financial system.

To that end, the Government is well advanced in its program of legislative reform. Today forged by the now twin imperative of the Hayne Royal Commission and COVID. In enacting that program, Parliament has afforded ASIC the regulatory tools we need, to continue taking a targeted, outcomes-based and less prescriptive approach to regulation. They also mean we can address harm arising from evolving products and practices without compromising the potential for competitive disruption and innovation.

So the recent past of an ASIC imploring Government for new regulatory powers and better field coverage  is just that. The past. It is time for us to simply get on with it.

But for ASIC it’s now not simply ‘regulation as usual’, it’s ‘regulation as better’ with both our new powers and greater playing-field coverage.  

With that in mind, today I will cover three things:

  • First, how ASIC is responding to our new normal of escalated uncertainty
  • Second, how we’re putting our regulatory tools to work, and
  • Third, how going forward we will use our new tools and data for a more calibrated, more targeted regulatory stance. And with it allowing responsible business to get on with it.

Turning first to how ASIC is responding to the uncertainty and disruption of 2020.

Notably, the foundations of our response precede the pandemic. It began with the Government and the Parliament bringing to life the Royal Commission recommendations. It has been supported by our new and better use of data. We now have and will have (subject to the Parliament) better regulatory tools and greater playing-field coverage. Think insurance claims handling. Think superannuation fund misconduct. Think product intervention powers. Think design and distribution obligations (DDO). Think real penalties for our foundation stone, section 912A – for firms to act efficiently, honestly and fairly.

In the early months of the pandemic we stepped in and up to help business and consumers through this uncertain time.

We focused on helping to ensure that Australia’s financial system, although under extreme stress, continued to be resilient and efficient. To get on with supporting their customers.

Importantly, Parliament had previously afforded ASIC ‘safety valve’ powers to do just that. An ability to:

  • provide relief
  • provide waivers
  • delay the start dates for some legislative reform measures, and
  • help abate the uncertainty faced by business, so they can get on with it.

And also, to disrupt any emerging opportunistic misconduct and stem any new tide of harm.

To have the bandwidth to deliver relief to Australian business, we recalibrated overnight. We paused some of our regulatory ‘good-to-haves’ and retained the ‘must-haves’.

This afforded us bandwidth to introduce ‘regulatory shock absorbers’. We issued temporary directions requiring large equity market participants to limit the number of trades they executed each day.

We provided relief to facilitate virtual shareholder meetings and extended the period for lodging financial reports.

We responded to meet the needs of companies to raise capital quickly by giving temporary relief to facilitate capital raisings. This included allowing certain ‘low doc’ offers to be made to investors even if they did not meet all the usual requirements.

These initiatives helped our capital markets remain strong and efficient. And from this, listed companies have raised over $41 billion since the pandemic began. Australia punching above its global weight for secondary capital raisings during COVID. Based on the relative size of our market, ASX-listed companies raised more secondary capital than those listed on the US, London and Hong Kong stock exchanges.

The Government (in May) announced it would defer some of the Royal Commission legislative measures due to be introduced this year. To allow industry to focus their attention and resources on pandemic responses and plan for post-pandemic recovery. We moved immediately in lock step to defer commencement of the mortgage broker best interests duty and the design and distribution obligations.

We also acted quickly and decisively to disrupt emerging misconduct and escalating harms. Let me share just two streams of endeavour.

We communicated to super trustees about the early release of super. We reviewed trustee websites and other communications about the scheme. We contacted trustees where we had concerns, and achieved corrective action in 26 instances. We used Moneysmart (the consumer voice of our regulatory work) to help people understand the impact of COVID and early release on their super.

We also lent a very public voice for consumer awareness about those who prey on the vulnerable. We used radio and social media. We asked and received agreement by mainstream media to make reference to Moneysmart and the Debt Helpline on news reporting on COVID-related financial hardship. ASIC’s Moneysmart social media campaign on pandemic-related scams also reached more than 1 million people between March and late August 2020.

A key consideration in all our work this year is to seek to support Australia’s economic recovery in our regulatory endeavour.

Today ASIC’s Commission bench is one of commercial, legal and economic experience and relevant regulatory semantic. This serves us well in making the many difficult judgment calls.

As a financial-system conduct regulator, ASIC is a decision-making engine. When and how to monitor, to surveil, to protect, to disrupt, to afford transparency, to provide regulatory guidance, to impose licensing conditions, and to litigate. Ultimately when and how to step in and when and how to step back.

ASIC’s ‘why not litigate’ stance requires us to satisfy two tests. First, have breaches of the law more likely than not occurred – do we have the evidence? And secondly, is pursing the matter in the public interest, is there regulatory value?

Embedded in the second test is an awareness and understanding particularly relevant at this time – a consideration of the real economic impacts of our regulatory decisions and actions. And how that may impact consumer and investor vulnerabilities and harms both in the here and now, and beyond. These are not simple black-letter legal decisions made in isolation. Understanding economic and behavioural drivers matter here.

The Commission’s collective expertise and experience, coupled with our appetite and confidence to robustly challenge each other, is paramount. Perhaps the most palpable example of this was our recent decision not to proceed to seek special leave to the High Court in the Westpac responsible lending case.

Central to the judicious application of these tests is good use of data and data analytics.

To this end, ASIC recently invested further in our data foundations, to drive efficiency and effectiveness in our regulatory work.

We now have a Chief Data and Analytics Officer and with this new role we have developed a recalibrated data strategy. We have implemented new systems that enable ASIC to better exploit our existing data but also create the foundations needed to scale up our analytics and data collection capability.

These systems use modern technology and advanced analytics to analyse and detect early warning signs of harm and unhealthy competition in markets. For where unhealthy competition exists you are more likely to find a greater opportunity and thus propensity for misconduct and ultimately harm. We’ve some great pilots underway in recurrent data. The value-add to our calibrated regulatory stance cannot be overstated.

But we need to go further. Parts of the playing field are data poor – for example, recurrent data for investment management and data for small amount credit contracts. Areas where we do not have specific data collection powers afforded to us by the Parliament.

And this matters. For small amount credit, to be able to go beyond the anecdotes and consumer surveys to a robust and comprehensive evidence base of emerging harm. Especially in a world of cumulative debt across many financial products. To also identify emerging systemic risks in the asset management world of managed investment schemes.

This is an ever-growing part of our playing field for which we do not have specific data collection powers. It forms the underlying ‘Lego blocks’ of much of our super system. And this opaque sector (managed funds) is of growing concern to us. There are four ‘here and now’ reasons.

First, investors (retail and wholesale) are 'far from the paragon of textbook finance theory' and the growth in housing asset prices and super balances have seen many unsophisticated investors become wholesale investors. 

Second, the act of asset management (the real stewardship of capital allocation) is challenged more than ever as risk-free rates flatline. At the same time, asset managers on the hunt for yield (starved of that yield in government bond markets) are moving to where others retreat (the banks) from private debt.

Third, and to quote the most recent edition of The Economist, 'investment funds are more complex than breakfast cereals.' This, combined with old-fashioned product disclosure, makes comparison and ‘shopping around’ difficult at best. ASIC is responding by requiring REs to have ‘true to label’ marketing and labelling, and releasing comparative data to support healthy competition.

Fourth, with the inevitable uptick in insolvencies and the extreme macro forces at play, investment managers will face greater liquidity challenges. As underlying assets come under stress (SME debt, corporate debt, private equity) so will the managed funds that invest in them. Some investors will likely be surprised to find they are unable to withdraw from previously liquid managed funds.

And this hugely important part of the playing field is regulated by ASIC, as it is by the FCA in the UK and the SEC in the US. And the thesis of that regulation is one founded on disclosure. Of consumer/investor protection through best interest duties, fraud protection, conflict of interest management and not (and rightly so) of investment strategy or price regulation. And with licensing and litigation our primary tools of the past, we are seeking to use new age tools. And I’ll come to that shortly. But to do so we need data.

So we are working with Treasury to ensure we have (and can publicly share) much greater data on retail management investment products, wholesale funds and non-bank lending.

It is a truth universally acknowledged that competition in and of itself doesn’t ensure good consumer outcomes. It is also a truth universally acknowledged that good consumer outcomes are more likely where competition is robust and effective.

In 2018, Parliament added the consideration of competition to ASIC’s mandate. ASIC has used its powers where unhealthy supply side competition caused consumer harm, as for example, with flex commissions in car finance. We have also sought to promote healthy disruptive competition, through (for example) the establishment of our Innovation Hub in 2015 and our concessional regulatory sandbox in 2016. The latter served as the model for the Government’s legislative regulatory sandbox in 2020.

Today, we have underway an assessment and review of competition in the Australian funds management industry to identify where competition is effective, where it is not, and if not why not. There is over a trillion dollars’ worth of assets under management in Australia, invested across retail investment products and wholesale funds.  Deloitte Access Economics is working with us on the underpinning research.

Meanwhile, we’re getting on with the job of supporting Treasury as it clears the way for business to operate efficiently and competitively.

And in our regulatory work we are keeping business, both big and small, front-of-mind.

It’s more than an understatement to say that many small business are doing it tough. Many face serious financial stresses and, in some cases, insolvency.

At the same time, many business have benefited from the ‘shock absorbers’ of government support, bank forbearance and regulatory relief.

And we are also publicly commending business (insurers and banks), which are stepping up to meet the disruptions and uncertainty that have spanned close to 12 months now. From last summer’s ‘new normal’ of escalated natural disasters to the unprecedented uncertainty of COVID.

At the same time, it’s important for firms to ensure that safeguards are in place to make it easy for consumers to navigate themselves to better outcomes.

For it is not only business experiencing uncertainty and stresses. The realities of COVID inevitably amplify and increase vulnerability across most Australian households. This can reduce people’s capacity to engage with financial decisions and handle ‘life admin’ tasks.  Such as choosing appropriate financial products, consolidating or switching loans. It can also reduce people’s capacity to assess information and can lower their defences.  Making them more vulnerable to scams and misinformation. Complaints should be easy to make, and customer pain-points in application and switching processes should be reduced wherever possible.

Products and services should not contain surprise fees or hidden features. This sort of ‘sludge’ harms consumers and ultimately costs business and shareholders.

ASIC will also continue to support government legislative reform.  We will intervene in a targeted way where needed, and (in response to industry demand) we will issue guidance to help business meet the challenges of the COVID economy and legislative reform.

Critically, we will build on the momentum of an overall successful program of enforcement and targeted interventions.

ASIC is getting on with the job by using the many tools we already had, and the new tools that are now at our disposal.

Putting our tools to work

Turning to the here and now of how we put our tools to work.

Today we use data (from reports of misconduct, recurrent data, market intel to competition analytics) to identify the right target. We look then to intervene proportionately to stop the misconduct and stem the harm we are addressing by using the right tool or tools.

Today we are more often than not using more than one tool to stem harm or disrupt misconduct in a targeted and calibrated way.

In our recent work in consumer credit insurance, we used six regulatory levers: surveillance, transparency (our report), (ongoing) investigative work, remediation to consumers, guidance to industry on product design and sales practices, and intervention (banning unsolicited outbound telephone sales).

Another real-time example is our recent review of Buy Now Pay Later. The report itself – a powerful yet simple use of regulatory transparency.

Our research (data we sought and received voluntarily from the entities involved, absent specific data collection powers) shows that while Buy Now Pay Later works for many, for some consumers it is not – with one in five missing payments.

Our report highlights the ability of recent regulatory reforms and new tools to deal with any consumer harm. By embracing their design and distribution obligations and own self-regulatory code, the industry can go a long way to addressing consumer harm. To step in and step up.

We acknowledge that some have begun proactively changing their business models to address consumer harms. With some, but not all, providers, capping late payment fees. Our new product intervention power (PIP) is always there as a backup. And I’ll shortly come to how industry action, design and distribution obligations and product intervention powers all fit together in the ‘new better’.

Turning to a second real-time example in the investment fund product space – our ‘true to label’ project .  Here we recently used levers such as surveillances, transparency (media releases), investigation, intervention (sending letters of concern to regulated entities) and enforcement action. We undertook a risk-based surveillance to identify investment fund products with inappropriate or confusing product labels. And in the absence of data collection powers we had to slowly harvest the data through surveillance and a tailored compulsory data request.

We looked at products from more than 350 managed funds with over $65 billion in assets, before zeroing in on 37 funds with around $21 billion in assets.

We told those fund managers to do more to ensure their products are ‘true to label’ – and demanded corrective action from 13 responsible entities. Most have taken the corrective measures. For those that have not, ASIC may take enforcement action.

Our action against the Mayfair 101 Group for misleading marketing targeting unsophisticated wholesale investors resulted in an interim injunction against the promotion of the debentures in April 2020. And the Federal Court is shortly to set a final date for hearing the matter.

We have also filed proceedings against RI Advice, an Australian financial services licensee, for failing to have adequate cyber security systems. This is the first action taken by ASIC against a licensee in respect of cyber security and cyber resilience.

Because enforcement is our longest standing and end-point deterrence tool we focus our resources accordingly. Enforcement represents just over half of ASIC’s regulatory expenditure.

I’ll update you on this work now.

We are continuing our Financial Services Royal Commission legacy pipeline. The Royal Commission made 13 referrals to ASIC. Of these, five are the subject of civil litigation, two remain under investigation and one matter received judgment (and significantly so) with a $57.5 million civil penalty (NULIS Nominees and MLC Nominees). Five referrals have been concluded with no further action.

ASIC has 16 Royal Commission case study matters underway, including six before the court, three being considered by the CDPP and seven under investigation. Five case study matters have been finalised: three resulting in collective civil penalties of over $20 million, and two others resulting in criminal convictions and fines.

Recently, as part of our Royal Commission work, we commenced civil penalty proceedings against ACBF Funeral Plans Pty Ltd and Youpla Group Pty Ltd for alleged misleading and deceptive conduct, and false and misleading representations, to many Indigenous consumers.

Our enforcement focus now also encompasses misconduct that seeks to exploit the pandemic environment.  This includes  predatory lending practices, mis‑selling of products, and poor claims handling, as well as opportunistic conduct such as scams, unlicensed conduct, and misleading and deceptive advertising. ASIC has 13 investigations underway that fall within ASIC’s COVID-related priorities and has commenced court proceedings in a number of these matters to safeguard assets for the benefit of consumers.

At the same time, ASIC is getting on with its investigations. In the period to end December 2020, ASIC is striving to file around 15 civil cases, refer around 20 briefs of evidence to the CDPP relating to approximately 25 individuals or companies, and refer around 10 individuals or entities for administrative action. And in 2020 alone, in just four matters, we have recorded over $87 million in penalties against the big banks (NAB, CBA and ANZ).

And while we are of course proud of our successes, we understand commentary focusing on ASIC’s losses, including the oft-cited ‘case of two’ – Westpac and Tennis Australia.

We understand, and expect, we won’t always be successful in our enforcement action. And nor should we be – lest we fall into the trap of pursuing the easy wins. But equally our model litigant obligations mean ASIC cannot run speculative litigation – we must have formed a reasonable basis for commencing any action as well as for appealing any decision.

And when we are not successful, we draw on the insights and lessons learned to do things better. And at times those insights inform policymakers. And importantly a win is not always the single prerequisite for market deterrence.

Beyond our near-term COVID enforcement radar are, inter alia, six target areas.  Misconduct in superannuation and insurance, illegal phoenix activity, auditor misconduct, new and emerging types of misconduct using new technologies, significant market misconduct such as insider trading, market manipulation and continuous disclosure matters.

We also continue to focus on consumer remediation. This has proved a resource intensive and at times frustrating endeavour for ASIC. We do not oversee all remediations and nor should we. That responsibility lies with the firms and ultimately their Boards. But we are currently monitoring over 100 remediations that could see a return of at least $4.6 billion to consumers. And we stand by the resources invested to date, because with that endeavour comes better (fairer but not always faster) consumer outcomes.

This week we will initiate consultation on our regulatory guidance for remediation. That guidance will set out what we understand the law requires of licensees. And then allow the firms to get on with it – both fairly and faster.

And in response to industry demand, we will release a field guide called Making it Right: how to run a consumer-centred remediation. This draws on our experience with remediations and behavioural science to help licensees with the ‘day-to-day’ design and execution of consumer-centred remediations. Licensees have been asking us for just those sort of practical tips.

Again, our plan on remediation going forward is for us to step back and business to more decisively step in and step up.

But for ASIC stepping back does not mean stepping away.

The way forward

Finally, on the way forward for ASIC.

As we move into our better regulatory age, we will make effective use of our new tools afforded us by the Parliament.

These two bookends exemplify outcomes-based regulation. A pivot by Government away from the blanket regulatory approach of the past.

This has afforded ASIC the opportunity for regulatory calibration, now firmly focused on consumer and market outcomes.

When we see significant detriment, or poor market outcomes – be it actual or likely significant harm to consumers or investors, or an absence of healthy competition creating fertile ground for potential misconduct.  Only then do we need to step in.

For today, this should only be when Boards and business have not stepped in and up, to deter misconduct and deliver good consumer outcomes. Design and distribution obligations are the (self-designed) roadmap for them to do so. Product intervention our tool to act when and if they don’t.

So we have the tools. The software script is written. Now we just need to let the program run, while we watch and act if the program fails to deliver the desired outcomes.

Let me briefly run though the bookends and how they will work.

The DDOs, which now commence on 5 October 2021.

DDOs will be a step-change for everyone in the financial services industry, but most importantly for retail consumers and long-term shareholders. All of this is key to managing non-financial risk – as manifest in the many case studies of the Financial Services Royal Commission. And ultimately at great cost to shareholders.

Business staying within their own set boundaries to meet their DDOs can and should provide scope for less enforcement action from ASIC. It may also provide an opportunity for deregulatory initiatives over time. It’s really up to business to pave the way for such deregulation to ultimately be contemplated by Government.

ASIC’s final regulatory guidance on DDOs will be released in coming weeks. We will continue to engage with industry as firms implement these important obligations.

Our PIP, in play since 2019, enables ASIC to temporarily intervene to respond to consumer detriment in a targeted, calibrated and timely way.

We are already using PIP where we think it’s needed. In October 2020 we intervened to impose conditions on the issue and distribution of contracts for difference (CFDs) to retail clients.

This order brought Australia into line with protections in force in comparable markets elsewhere. It targeted CFD product features and sales practices that amplified retail clients’ losses – and those losses are significant. ASIC’s previous reviews of the past few years found that most retail clients lose money trading CFDs. During a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million.

On the issue of risky products for retail investors – last month the Federal Court ordered that AGM Markets, OT Markets and Ozifin Tech pay $75 million in pecuniary penalties for engaging in systemic unconscionable conduct while providing OTC derivative products to retail investors in Australia. This is the highest cumulative penalty in ASIC’s history in a single proceeding. Clients lost about $32 million from trading complex and risky products.

In his judgment, Justice Beach noted most retail investor losses here were attributable to excessive leverage, in a 'classic example of unsophisticated retail investors seeking such financial heroin hits'. Further, 'there is considerable merit in ASIC’s proposal (CP 322) … If such measures had been in place, most of the egregious conduct and its consequences that was exposed in the present case would in all likelihood not have occurred'.

ASIC has also intervened to ban a model of short-term credit found to cause significant consumer detriment due to fees that, when combined, could add to almost 1000% of the loan amount.

And as many know, we are considering the use of PIP in relation to continuing credit products, and the sale of add-on insurance and warranty products sold with motor vehicles.

Because PIP is proactive and flexible, ASIC only needs to take enforcement action if there is non-compliance coupled with significant consumer detriment.

So ASIC’s new age is here. And we are getting on with it.

We are better placed to address harm arising from evolving products and practices without compromising the potential for competitive disruption and innovation. Which means we can limit or avoid the future need for more intervention and more regulation.

But we will also maintain our enforcement focus. Itself calibrated in answering our two ‘Why not litigate’ questions. And mindful of the economic forces and behavioural responses at play.

The easiest way to stay off our radar is by living up to Parliament’s and community expectations and following the DDO roadmap.

Our new age is about awareness of market realities and placing a competitive market, and consumer outcomes, at the centre of everything we do.

Because at the end of the day it’s our job. And we are simply getting on with it.

Thank you.

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