New Frontiers in Regulation

Opening statement by ASIC Chair, James Shipton, at the CFA Societies Australia Investment Conference, Sydney, 17 October 2019

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Introduction

Good morning everyone.

Today I will briefly speak about the important concept of 'Other People’s Money' and ASIC’s strategic priorities, particularly our multi-dimensional and multi-disciplinary approach to regulation.

Afterwards, I look forward to continuing the discussion with Anthony.

Other People’s Money

Twenty months into this role, and back in Australia, I still think the financial services industry can better focus on the end user – people.  

Finance needs to ensure it stays true to its ultimate function of serving the economy, and people individually and collectively. In other words, stay true to its societal purpose.

As many of you will remember, one of the best descriptions of the broader purpose of finance is from Professor John Kay’s book Other People’s Money – which was written in conjunction with the CFA Institute’s Future of Finance initiative.

The description has four parts:

  1. The first function is capital allocation - matching those who need capital with those with excess capital.
  2. Second, inter and intra generational transfers of wealth – such as retirement schemes.
  3. Third, hedging and insuring against risks – In your world you automatically think of the derivative and options markets. But most of society hedge via personal insurance products.
  4. And finally, the payment system itself – the core plumbing of our modern economy and society.

I would encourage people in finance to reflect on these goals and ask how each of you can further the purpose that is most appropriate to you.

To do this, each of you has a role in promoting:

  1. Greater Professionalism, as well as
  2. An awareness that finance ultimately serves people and communities.

I want to acknowledge here that Paul Smith, the CFA’s outgoing CEO, and the CFA Institute have long advocated for more professionalism in the industry.

So, how can we help achieve this?

I think these goals are ultimately helped by embedding ‘fairness’ into every corner of the financial system. 

ASIC’s key strategic priorities

Turning quickly to what we are doing.

We have identified in our recent Corporate Plan our key strategic priorities that are aimed achieving our vision for a fair, strong and efficient financial system for all Australians

The strategic priorities we have identified represent the most significant ways in which we are addressing consumer harm, punishing wrongdoing, and encouraging better culture and behaviour in the financial system and corporate Australia – including through a greater emphasis on fairness and professionalism.

Concepts that I hope to come back to during the fireside chat.

Our strategic priorities for the year ahead are:

  1. First - High deterrence enforcement action
  2. Secondly - Prioritising the recommendations and referrals from the Royal Commission
  3. Thirdly - Delivering as the primary conduct regulator for superannuation
  4. Fourth - Addressing harms in insurance
  5. Fifth - Improving governance and accountability
  6. Sixth - Protecting vulnerable consumers
  7. Seventh - Addressing poor financial advice outcomes

Another thing that is different this year about our strategy is that we have highlighted the range of regulatory actions we propose to deploy in relation to each of our strategic priorities.

This is because we recognise that we need to utilise the full suite of our regulatory tools to achieve our goals. Just one tool is very unlikely to be effective.  

To this end, where we identify problems and harms in the financial sector, we will make the most of our enhanced regulatory toolkit by selecting the tools most appropriate to address the problem.

We are very deliberately taking a multi-dimensional and multi-disciplinary approach to our job as a regulator.

We also have to recognise the limitations of certain tools. One example is the need to shift away from an over-reliance on disclosure to protect consumers. Instead, we will look to use targeted powers like the product intervention power more often in the future.  

And, as you will be aware, earlier this week, we published an important joint report with the Dutch regulator – which explains the inherent limitations of disclosure.

The key limits of disclosure identified in the report, and supported by 33 case studies across 5 jurisdictions, include that:

  • Disclosure does not 'solve' the complexity in financial services markets
  • Disclosure must compete for consumer attention and influence
  • One size disclosure does not fit all: the effects of disclosure are different from person-to-person and situation-to-situation
  • In the real world, disclosures can backfire in unexpected ways
  • And a warning about warnings: warnings do not always work as intended.

Therefore, enhanced responses by regulators is needed (I’ll come to that shortly) and, crucially, responsibility also rests with the sector itself who must knowingly recognise that they are not doing justice to consumers by solely relying on disclosure, without asking themselves 'What else can you do to properly inform your customers?'.

Coming back to what else we are doing to respond to the 'new frontiers' of regulation. We are adopting and applying:

  • Our enhanced supervisory approaches, including the Close & Continuous Monitoring (CCM) program and the Corporate Governance Taskforce,
  • Our new product intervention power (PIP) and preparing to implement Design and Distribution Obligations (DDOs), and
  • Advancing our Regtech initiatives.

I will very briefly touch on each of these now.

Enhanced supervisory approaches

ASIC’s CCM program commenced in October 2018.

It is designed to more effectively assist ASIC to positively reduce the likelihood of future financial harm to consumers and thus enhance the community’s confidence in our major financial institutions.

  • We have been conducting onsite reviews at the subject institutions — AMP, ANZ, CBA, NAB and Westpac, and
  • We have been providing important, detailed and targeted feedback to CEOs, Chairs and other business leaders on our concerns and observations.

Our corporate governance review is also well underway, and we are conducting two workstreams:

  • Director and officer oversight of non-financial risk, and
  • Governance structures regarding the granting of variable remuneration to key management personnel.

Earlier this month, we released our report on non-financial risk which identified shortcomings in the oversight of non-financial risk by directors and officers in seven of Australia’s largest financial services companies.

This report is a “must read” for all directors and senior officers, particularly those involved in risk functions.

PIPs and DDOs

We have also moved quickly in adopting the product intervention power (PIP).

Within months of receiving the power, we announced several proposals to deploy it to reduce significant consumer detriment:

  • for example, in relation to short term credit, as well as to propose a ban of OTC binary options and limit distribution of CFDs. 

We are preparing to implement the design and distribution obligations (DDOs), which commence in April 2021, by developing guidance to set our expectations for compliance of this fundamental obligation.

Regtech

ASIC can see a future where artificial intelligence including machine learning, text analytics, voice analytics, and other technologies are a seamless component of financial services firms’ business models.

We believe this can in turn aid strategic business insight analysis and training and development, and improve risk and compliance outcomes at scale - with greater efficiency and at a reduced cost.

Accordingly we are working with industry on a series of initiatives to help evolve this sector.

Our Regtech Initiatives series has also proven to be a catalyst for the strengthening of dialogue between financial services firms and technology providers.

Conclusion

In closing, there are high community expectations on not only the entire financial sector right now, but also on the regulators.

Ultimately, we all need to lean into this challenge because Australians deserve a fair, strong and efficient financial system.  

Thank you and I look forward to the fireside chat.   

Last updated: 17/10/2019 12:00