Responsibility amid change

Speech by ASIC Chair Joe Longo at the AFR Super & Wealth Summit, Monday 22 November 2021.

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Good afternoon and thank you to the AFR for inviting me to speak today. How good it is to be in front of a room of people, rather than staring at a screen.

I would like to begin by acknowledging the traditional custodians of the land on which I am standing, the Gadigal people of the Eora nation. I pay my respects to elders past, present and emerging.

Before lunch, Helen Rowell highlighted the retirement phase as a major challenge facing the superannuation industry. After some opening remarks, I will give an ASIC perspective on this and related areas of focus for the superannuation industry.

As some here might know, I last worked at ASIC 20 years ago, as head of enforcement. I am often asked what has changed since then. The short answer is much has changed, yet some very fundamental things haven’t.

What has changed?

  • ASIC was not responsible for the consumer credit and lending rules.
  • Nor was ASIC responsible for financial services licences, concerns over litigation funding or cyber risk, nor did ASIC have oversight over insurance firms’ claims handling.
  • Managed investment scheme rules were still being hammered out.
  • And, significantly for my remarks today, ASIC was not the conduct regulator for the superannuation industry. Indeed, the industry was in its infancy, with total funds under management a mere $500 billion. It’s now over $3 trillion.
  • And as for bitcoin, crypto-assets and non-fungible tokens… the stuff of science fiction!

Yet, more change is on the way. ASIC’s jurisdiction and responsibilities continue to broaden.

However, there are some fundamental aspects of ASIC’s work which have not changed. With that in mind, I want to start with ASIC’s commitment to enforcement. I then plan to turn to two other topics:

  1. The evolving regulatory landscape over superannuation; and
  2. Some reflections on the crypto phenomenon.

Enforcement

We know that a strong commitment to targeted, credible corporate law enforcement is a critical feature of effective regulation. That has not changed from when I was last at ASIC.

It is essential that ASIC maintain and enhance a strong reputation in the market and the general community. Investors and consumers must have confidence that the financial system works, that it works for them… and I might note that nowhere is that more important than in sectors such as superannuation and wealth management.

We must regulate in a way that both supports legitimate business activity and allows for the independent discharge of our key regulatory and enforcement responsibilities. These outcomes are not mutually exclusive. By enforcing the law against those who break the rules, we support those who want to do the right thing.

ASIC is not here to eliminate risk. Risk taking and encouraging innovation is an essential part of Australia’s financial system and economy. But where industry has neglected to take its share of responsibility, ASIC will not hesitate to deploy the powers in our regulatory toolkit – to deter misconduct that causes harm, hold to account individuals and corporations that treat their responsibilities as optional, and drive a culture of better corporate behaviour.

We now have a range of recently legislated powers available to augment our regulatory toolkit. These include new and increased civil and criminal penalties for misconduct and powers of intervention to prevent unsafe financial products being distributed. This means we can take considered and proportionate action where we find harm or wrongdoing.

We will use the full range of our regulatory powers, from our supervisory work through to litigated enforcement matters. You can expect nothing less.

You may have noticed that ASIC has today released updated regulatory guidance (Regulatory Guide 100 Court enforceable undertakings and Information Sheet 151 ASIC’s approach to enforcement) which highlights that court enforceable undertakings are a flexible enforcement tool that will be used to improve compliance with the law. They are one of the options that allow us to take targeted, proportionate action.

We will only use court enforceable undertakings where it is in the public interest. Offenders should be held accountable for their poor conduct, and publicly acknowledge that accountability, regardless of which enforcement tool we use against them.

Superannuation and wealth

And now to matters of more specific relevance to a superannuation and wealth-management audience.

The industry landscape is shifting and evolving. This reflects a range of factors, including the regulatory environment. ASIC’s role expanded on 1 January 2021 to enable us to more effectively regulate superannuation trustee conduct without detracting from or duplicating APRA’s role as the prudential regulator.

We are focused on how super trustees deal with consumers – is it fair? Does it meet the needs of members? Does it promote confidence?

The superannuation industry is here to serve Australians – not the superannuation industry. The significant duties of super trustees under the law mean that we should expect to see a culture within superannuation fund operations that is all about delivering for members – but unfortunately this is not always seen in practice.

We have seen plenty of examples where the industry has not delivered the outcomes consumers should expect. Our recent enforcement actions illustrate this – unsurprisingly they have highlighted that it is not efficient, honest, or fair to charge for services that are not provided, and nor is it efficient, honest or fair to mislead members in a way that might cause them to retain a higher fee product when a lower fee one is available.  

We will continue to act against misconduct of this kind.

There are three issues which trustees are thinking about currently that I want to comment on:

  • Performance – We are focusing on communications made around performance by those trustees who recently failed APRA’s performance test. Where we identify misleading or deceptive conduct, we will intervene to achieve corrective disclosure or take enforcement action, if appropriate.
  • Distribution – Do consumers get into products that are suitable for them, or are they misled or ill-advised? Can trustees hand-on-heart really say that the plethora of super products out there are good and useful? We are proactively surveilling the industry, and where we find trustees breaching the law and not acting in good faith, or where their conduct causes actual harm, enforcement action is likely.
  • Retirement focus – Trustees must challenge themselves to focus on the overall retirement needs of their members, not just the accumulation of a superannuation balance. We are working on forecast tools and consumer information to assist trustees in helping their members.

Here’s a challenge for every trustee to consider: how do their operations compare to an asset manager of a similar size?

Trustees’ participation in the market is increasingly direct, with many large superannuation funds moving investment management functions in-house. As trustees insource more in terms of market participation, they need to ensure they have robust risk-management, compliance and governance arrangements specifically focused on their obligations as market participants.

ASIC recently examined switching of investment settings by directors and senior executives, highlighting widespread poor conflict-management arrangements. This is very concerning, given the level of sophistication and governance required of trustees when managing billions of dollars in assets on behalf of fund members. They deserve better.

Recent reforms provide for stapling of accounts, where the super fund follows people from job to job. Some have questioned whether this means being stuck with a poor performing fund for your working life. But surely the real issue there is that the fund is performing so poorly in the first place?

As the conduct regulator, we focus on the behaviour of superannuation trustees to improve consumer outcomes.

Superannuation members need to be confident that those entrusted to act on their behalf do. And that confidence is justified.

The impact of innovation

I mentioned at the outset the pace of change, and how ASIC now oversees laws and obligations barely thought of 20 years ago. In less than half that time we’ve landed in the crypto-universe.

Its recent rise to prominence has been nothing short of phenomenal, and impossible to ignore. Senator Andrew Bragg’s select committee has made a series of recommendations on:

  • cryptocurrency and digital asset regulation
  • decentralised autonomous organisations (or DAOs, being a whole new form of collective enterprise, more about those in a moment), and
  • our tax and anti-money laundering and counter-terrorism regimes in the digital world.

This is a very ambitious agenda. Collectively, these recommendations constitute a very challenging set of policy questions for Parliament to consider. ASIC is working closely with Treasury to assist in answering these questions.

As the corporate and markets regulator, I have to admit to a certain fascination with DAOs, decentralised autonomous organisations. What are they? What do they do? How can DAOs be regulated? Put simply, DAOs are organisations governed by artificial intelligence in the form of smart contracts, using blockchain technology, to record transactions with and between their members and third parties. No boards of directors or employees in sight, and the rules of engagement are encoded in smart contracts. Indeed, it has been said to a large extent DAOs work on the basis that the ‘rule of code’ replaces the ‘rule of law’. The modern corporation, with its limited liability and boards of directors, all of whom are now required to apply for lifelong, unique director IDs, seems a world away from this virtual community.

To paraphrase a concept familiar to corporate lawyers, to whom does ASIC turn to ascertain the directing mind and will of a DAO? It is not clear who is accountable if things go wrong, or don’t go as intended or anticipated. Nor is it clear how a DAO itself can be held accountable in a court of law.

The policy challenge for traditional forms and methods of regulation is readily apparent. Legal analysis of how DAOs work is at an early stage, with many unanswered questions: what is the nature of a member’s interest in a DAO? Is it like a share in a company or a unit in a managed investment fund?

Wherever we land from a policy perspective, Senator Bragg’s committee was right to highlight the fact that crypto is on our doorstep, here and now, and being driven by extraordinary consumer and investor demand.

The implications for consumers are potentially huge. It is almost an article of faith that no one should invest in something they don’t understand. Who among us can say they really understand crypto-assets and cryptocurrencies?

In my view consumers should approach investing in crypto with great caution. The maxim ‘don’t put all your eggs in one basket’ comes to mind. 

Those here who are directly involved in the broader managed investments sector will understand the serious implications of investing without understanding. It is not an approach to be undertaken lightly.

The demand-driven nature of the rush into crypto has thrown up some unique challenges. At present many crypto-assets are probably not ‘financial products’, making it difficult for financial advisers to offer counsel. So, what can they do when clients are banging down the door wanting to divert their savings into Ethereum or Dogecoin, a currency originally conceived as a joke?

ASIC has already provided some guidance on exchange traded funds linked to crypto-assets – they at least are financial products, and traded on a licensed exchange, so there will be some protections there – but for the most part, for now at least, investors are on their own. 

The fact Australia’s largest bank is already proposing a means of crypto-exposure for its retail customers is telling. Yes, it’s only a pilot project, but the overall direction is clear. This debate is no longer on the fringes of the financial services industry.

The pandemic and lockdowns, coupled with low interest rates, have accelerated the pace of change in the market. And the technology underpinning these changes brings with it many potential opportunities and benefits.

In conclusion, ASIC does not strive to eliminate risk. But, nor should we ignore it. ASIC will always enforce the law as it stands, using the many means available to us. We need to be careful those laws keep pace with change, and with the community’s realistic expectations and demands.

Last updated: 22/11/2021 12:00