Managing risks over the coming year: A message from ASIC Commissioner Cathie Armour

Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, March 2015.

At ASIC, we devote considerable time and expertise to identifying and monitoring risks to Australia's financial markets. We regularly ask ourselves what risks are present or emerging that could jeopardise our ability to promote fair, orderly and transparent markets and investor and financial consumer trust and confidence.

We expect Market Participants to ask similar questions in relation to their own businesses. Not only is this critical to developing the resilience to withstand such risks, it is a fundamental requirement of being licenced to provide financial services.

With this in mind, we have developed a (non-exclusive) short-list of some of the risks we consider should be on your radar in 2015.

Changes which affect client monies

Protection of client monies is an important topic. Firms have been penalised for breaches of client money rules in Australia and overseas. Current and future changes to Australia's clearing and settlement infrastructure seek to improve the protection of client money, for example, the move to a T+2 settlement cycle in early 2016.

Ask yourself: Do you have robust client money systems, as well as procedures for managing change to these systems? Are your staff trained in the potential consequences of a failure to maintain the status of client money?

International market developments

Globalisation, technological innovation and increased competition will continue to drive changes in international markets this year. Failing to adapt to amendments to laws and regulations in the jurisdictions in which you operate could give rise to significant financial or reputational damage to your business.

Ask yourself:Has your business sought legal advice on applicable laws and regulations and have you taken out appropriate insurance? Does your business have appropriate structures in place to monitor on-going compliance with these requirements?

Cyber-crime and business continuity

Cyber-crime poses a risk to the integrity of financial markets. In particular, increasing reliance on technology for the provision of front, middle and back office services heightens the potential impact of this risk on business continuity.

Ask yourself: When did you last review the technology services, systems and resources utilised from front to back office (ASIC considers this should be done annually in conjunction with ongoing evaluation and vigilance)? If a cyber-threat eventuates, how will you ensure your security, business continuity and the protection of confidential information are maintained?

New product offerings

The final report of the Financial System Inquiry was released on 7 December 2014. Recommendation 21 is especially relevant to Participants. It recommends the introduction of a targeted and principles-based product design and distribution obligation. The obligation would require that:

  • during the design stage, product issuers identify target and non-target markets, taking into account the product’s intended risk/return profile;
  • during the distribution stage, issuers and distributors put in place appropriate conditions of distribution, according to the target market for the product; and
  • after the sale of a product, issuers and distributors conduct periodic reviews to assess whether the product continues to meet the needs of the target audience, and whether its risk profile is consistent with its distribution.

Implementation of this recommendation is a matter for the Government. However, ASIC considers that complex products should be developed and distributed with these kinds of controls in place.

Ask yourself: Is your business adopting these kinds of practices, particularly during the distribution and after-sales stages of complex financial products?

Conduct risk

Conduct risk events are a result of avoidable behaviour on the part of a business' management or employees. They tend to be motivated by a misalignment between the interests of employees and the long term interests of the business, but may also arise from employee incompetence or inadequate staff training. Conduct risk can have significant ramifications for a business, its shareholders, clients, customers, counter-parties and the industry.

Ask yourself: Has your business undertaken a discrete conduct or cultural review in the past two years? How do you validate whether behavioural expectations are being met?

Forward looking statements

Forward looking statements or forecasts relate to the future performance of stocks, companies, projects, or production targets. Brokers or analysts may make these statements in order to make buy or sell recommendations. The Corporations Act provides that representations about future matters are misleading if they are made without reasonable grounds (qualifications or disclaimers are not sufficient to prevent them from being misleading).

Ask yourself: Are your analysts and advisors aware of their legal responsibilities when making forward looking statements? Are they able to establish reasonable grounds when providing advice or information about a future matter?

Appropriate risk management will help to ensure that the year ahead is a successful one, both for your business and for Australia's financial markets. If you aren't already, we encourage you to ask yourself the questions listed above and to develop strategies for responding to these risks.

Regards

Cathie Armour

Last updated: 10/08/2021 11:19