Greg Medcraft talks to Zilla Efrat about how ASIC is becoming more proactive and transparent in an ever more complex corporate regulatory environment that has been reshaped by the GFC, increasing globalisation and technology innovations.
Greg Medcraft has had plenty of time to find his feet at the Australian Securities and Investments Commission (ASIC). He was appointed its chairman in May 2011, but actually joined the corporate regulator as a commissioner in February 2009.
However, rather than making sweeping changes, he has fine-tuned ASIC’s structure and simplified its objectives to be more aligned with its legislative mandates, business plans and performance management systems.
Under his leadership, ASIC has also become increasingly transparent, releasing far more information to the market than in the past, and, rather than just dealing with the financial press, it is reaching out more broadly to all Australians via the print and electronic media.
Medcraft says he is a strong supporter of self-regulation and free markets, having spent almost 30 years in investment banking with Société Générale in Australia, Asia, Europe and the Americas. By 2007, he had become its managing director and global head of securitisation, based in New York.
While in the US, he co-founded and later became chairman of the American Securitization Forum, an industry group representing major stakeholders in the US$1 trillion US securitisation market.
Medcraft left the US in 2007, just before the start of global financial crisis (GFC), supposedly to retire. But this did not last too long. He was soon involved in local politics, becoming a councillor of the Woollahra Council in Sydney’s East, did some consulting work and was appointed CEO of the Australian Securitisation Forum, the peak industry body for the Australian securitisation market.
One of Medcraft’s key aims is to ensure ASIC becomes more proactive in identifying and responding to emerging risks in an increasingly complex financial world market that is fast being reshaped by increasing globalisation, technology innovations and the growth in social media. "I don’t want to be the ambulance that arrives at the accident. I want to have cops out on the beat to make sure we don’t have accidents," he says.
Medcraft, who will take over as chairman of the International Organization of Securities Commissions in March 2013, recently sat down with Company Director to discuss the changes reshaping ASIC and the corporate regulatory environment. An edited extract of that interview follows.
CD: How has the GFC changed the world for corporate regulators?
GM: The financial system has been tested around the world and often that is what shapes change. As a result of the GFC, we are now seeing proposed changes in regulation domestically and offshore. The key challenge is to turn what comes out of this into appropriate regulation and not undue regulation. There are certain things we can learn from the GFC, but we also have to ensure that making one change doesn’t lead to unintended consequences. We are being shaped by one crisis, but we have to ensure the changes we make don’t create the next crisis.
I think Australia has come through the GFC very well as a country. We have tightened up many things where appropriate. There have been many regulatory changes globally and it is important for us to participate in global forums to ensure the changes are appropriate and can be shaped for our jurisdiction if we want to be part of their global adoption.
CD: How do you believe ASIC’s structure and focus have changed since the start of GFC?
GM: Before the GFC, my predecessor, Tony D’Aloisio, launched a restructure of ASIC following a report by McKinsey & Company. That positioned us very well for the future.
We moved away from being the traditional three or four silo regulator – enforcement, consumer directorate, strategy and so on – and created 12 stakeholder-facing groups so we could become much more market focused. This changed our culture and assisted us in dealing with the GFC. ASIC also moved to recruit more people with business or markets experience to assist in that market-facing culture. This included the recruitment of the commissioners and I was the first investment banker ASIC had hired as a commissioner.
When I was headhunted for the role, I liked ASIC’s new structure. Being a markets person and the previous head of an industry group, I am a strong supporter of self-regulation. ASIC’s structure facilitates good self-regulation by understanding and engaging industry. Often industry is in a better position to shape solutions than a regulator.
The structure was a good one, but I have fine-tuned it. We had five or six objectives and I simplified these to three, which are all now aligned to ASIC’s legislative mandates. This is to ensure investors are confident and informed, that markets are fair and efficient and that registers are cost effective and accessible.
I took the word "protected" out of the language because it is a bit misleading to claim you can protect people.
I then proceeded to align the organisation to our three objectives. We now have a consumer and investor cluster, a markets cluster and a registry cluster. We have also aligned the commissioners, business plans and performance management systems to the three objectives. I now have three concepts by how I measure people: Did you achieve your business plan? Did you meet your budget? And, how did you align with our values?
We have also fine-tuned our values down to three: accountability, professionalism and teamwork or APT. These came out of a bottom-up discussion with the staff. Basically, this is all about ensuring the organisation is completely aligned and that the alignment extends to the performance management system. I am big on making sure people set realistic goals and have reasonable assessments. That comes from my investment banking background. I believe in empowering people, but equally I believe in holding them accountable.
We have also simplified the enforcement teams so we now have one for financial services, consumers and investors; one for markets; and one for registry.
I believe strongly in being transparent and upfront and that any organisation I lead should reflect that. We have become much more transparent. For example, we published our Enforcement Guide for the first time in February, and every six months we will publish our enforcement record for the previous six months.
We also said recently we will comment publicly on our investigations, which is something we have never done before. And, very soon we will publish our approach to surveillance so that the market knows what we do in this area.
It’s important to tell all Australians what we do, not just the financial press. So we are also reaching out more broadly to the print and electronic media.
CD: What are ASIC’s key strategies?
GM: Because one of our objectives is to have confident and informed investors, education is our number-one priority. We have a free market and we can’t be on every corner to police things, so it’s important that consumers have the tools needed to exercise their rights and advice they can trust.
One educational tool is our MoneySmart website, which has had over two million hits since it was launched last year. It has won numerous awards and other countries are considering buying its content. MoneySmart is also on Twitter and Facebook and we now have 200 educational videos on YouTube in 16 different languages. We have also just released a budget planner "app" for iPhones.
As a regulator, and when looking to allocate resources, my philosophy is to be proactive and forward-looking in identifying emerging risks so that when we do see areas coming up that are of concern, we can give people information and provide them with the ability to understand the risks.
Another exciting education initiative is the financial literacy program we are rolling out across 10,000 schools in Australia. From next year, this will start to be incorporated in the national curriculum from kindergarten to year 12 in all subjects. This is important because we are dealing with our future adults and we need to ensure they have the tools to manage their finances. We are also doing a lot in vocational education in trade schools and have a special Indigenous financial literacy program as well as an Indigenous financial website that is being rolled out across the north of Australia.
Prevention is better than cure. That’s why we are investing in education. It’s about trying to call things early, rather than being reactive.
The second leg of our strategy is to hold gatekeepers to account. Gatekeepers are those people in the financial system that have a job to do in making sure investors can be confident and informed. They include company directors, accountants, auditors, lawyers (to the extent that they advise gatekeepers), market intermediaries and market participants.
This drive has included some of the action we have taken against directors in relation to their governance and the timing of, and accuracy of, their continuous disclosure.
I believe we have very good corporate governance in Australia, but sometimes the market needs a bit of a reminder.
Holding gatekeepers to account is about setting standards that don’t just set compliance law, but go beyond the law. It is about best practice. If you are a well self-regulated group, we won’t be paying you that much attention.
A third area of our strategy concerns behaviour and understanding how consumers make decisions. Many don’t read long prospectuses. We look at how they are affected by advertising and how messages are targeted at them. We don’t want consumers buying products that are really complex and which they don’t understand or are wrong for them.
CD: Are there any moves afoot to improve prospectuses, which are often unwieldy, very long and difficult for retail investors to understand?
GM: Unfortunately, for some people you have to prepare that detailed document, but then there are others who need that information presented in a more clear and concise fashion.
At the end of the day, if you think about it, what an investor is trying to determine are the risks and sustainability of a business model. We will be coming out soon with some guidance on disclosure in the operating commentary.
But I do think it’s about multi-channel communications and how you reach out to different audiences. I am a fan of focusing on different groups and different media. Some people still want paper, but we are moving increasingly to an online environment, which opens up many more opportunities to target different groups.
CD: What are the major challenges for regulators globally?
GM: There are three. First, that innovation doesn’t outstrip regulation as improvements in technology and the growth of social media create a need for change. Second is the movement of savings from the banking system to the non-banking system – for example, into superannuation. The third challenge is globalisation, which is making the world smaller. For example, an attack on your stock could come from outside of Australia.
CD: What are the biggest future challenges for ASIC?
GM: There are three big ones. Firstly, the massive growth in superannuation, which is set to surge from $1.3 trillion to $5 trillion in funds under management over the next 20 years. The superannuation industry invests in equities, debt markets, managed investment schemes and so on, and we have to make sure the gatekeepers of these are well regulated. There is also the growth in self-managed superannuation funds where there is no one looking over investors’ shoulders. That is a concern for us purely because of our mandate for being responsible for financial literacy. This is a challenge now and it will become a greater one as more growth occurs.
The second big challenge is complexity. This can be the complexity in financial products – such as contracts for difference, synthetic exchange-traded funds or capital-guaranteed products. Or it can be complexity in markets, such as high-frequency trading, dark pools, cyber crime or the ability of people offshore to create scams that rob people of their money.
The third is remaining proactive as a regulator to mitigate future risks given the challenges like the growth in super and increasing complexity. How do we get our cops out on the beat to make sure people can be confident in our markets?
CD: Has there been a change in the way you approach litigation?
GM: Litigation is a very heavy, costly tool and I will not waver from using it if I think we need to. I’ve actually accumulated reserves now to ensure we have the funding for it. It is always important to talk softly and to carry a large stick. But my approach is to be as efficient as possible.
If ASIC sees a problem in a sector, it always starts with the most efficient tool, which is engagement. We talk to see if we can solve the problem. Then we have surveillance. We go out and look at a sector if we see a problem and raise it with those involved. If we see a big problem, we may come out with new guidance for the sector. We then do education and then we might move on to enforcement. And if that doesn’t work, we will make policy recommendations to government. I see it as a journey and enforcement is part of it. Enforcement is always an option and you must never be reluctant to use it. But I am a big believer in there being levels of intensity and that you can turn the dial up or down at any point.
We have published guidance so that business understands the principles we use to decide whether to take action. There are three principles. Firstly, we look at the amount of harm or loss. So, for example, if there are lots of investors who have lost a lot of money through bad governance, that will probably tick that box. Then we look at the cost versus the public benefit of taking enforcement action. In other words, we assess whether this is the best bang for our buck. Then we look at the availability of evidence. If you haven’t got the evidence, you haven’t got a case. This is something people often don’t understand when complaining that we didn’t do anything. We also look at alternative remedies. Would engagement or another method solve the problem? We are trying to think laterally, rather than just using the court system.
CD: What were the benefits from the Centro litigation?
GM: The case clarified the law in terms of directors’ duties. There are four simple principles here. Directors need to be sceptical. They must be able to read a set of financial statements, understand the business and understand that delegation does not remove their accountability.
CD: How does your enforcement fit in with the rise in litigation funding and class actions? Are you often targeting the same people?
GM: We have different objectives. We look at enforcing the law and not necessarily at recovering funds, although our action may be punitive. Litigation funders clearly have a role to play. At the end of the day, it is a free market and if someone is willing to fund somebody in an action, I support that free enterprise.
CD: How would you like to see litigation funders better regulated?
GM: I believe the Government is still looking at how to regulate litigation funders. Last month, we released a consultation paper seeking the views of stakeholders on our proposals on how litigation funders can manage conflicts of interest. We have proposed that each funder and lawyer relying on the exemptions in the regulations should be responsible for determining their own arrangements to manage conflicts of interest, but they must be able to demonstrate they have adequate arrangements in place. [Comments on the consultation paper should be submitted to ASIC by 21 September 2012.]
CD: Coming to continuous disclosure obligations, do you believe there is more work needed to clarify when and how companies and their boards should disclose information?
GM: Yes, I think there is. The Australian Securities Exchange (ASX) is working on that. Here again, we are shaped by change and new technology. The objective for any entity is to make sure its stock is trading on proper information and that is a challenge these days, particularly in the age of instant communications and social media. You have to be able to monitor the information on which the market is trading and ensure it is transparent and that the market is not misinformed. I believe it is about having good systems and the best-practice tools in place to monitor information about your stock.
However, we do recognise that listed entities need clear guidance about their continuous disclosure obligations and we are working with ASX to update its guidance on continuous disclosure, which we expect to be released later this year.
This work will examine what "immediate" means [in terms of the requirement that listed entities must provide "immediate" disclosure of price-sensitive information]. This is particularly challenging as companies become more international and are required to respond to publications about their companies from numerous sources, including social media. Immediate doesn’t mean instantaneously, but we think it does mean promptly and without delay.
Even apart from legal obligations, companies should try to make sure any announcements are clear and complete.
My advice to boards would be: Do not leave readers to read between the lines. Do not assume they will read it all. And, if you think people should not trade on an announcement then say so (just like when there is a formal takeover bid)
If the announcement is not material, say so in the text, and then say why you are making the announcement – for example, to address speculation.
Also, be careful in the headings of the announcement – try to encapsulate the tenor of messages there. Headings are often the things that will get reported in the media.
CD: What have been the benefits of ASIC taking over responsibility for market supervision from ASX and what are your challenges in this area?
GM: One of the benefits continues to be the reduced time taken to start investigations from the first indication of suspicious market conduct. The duplication of enquiry between ASX and ASIC has been removed. Of the 111 market matters referred to our enforcement team since we took responsibility for market supervision in August 2010, investigations formally began within 30 days of detection for 33 of these matters. A further 42 investigations began within 30 to 60 days of detection. Previously the minimum time would have been more than 60 days.
Our biggest challenge is to keep pace with the growth in electronic trading. We need to plan for a future that will include much more message traffic, new technologies and trading techniques, heightened competition between trading venues and the increasing globalisation of capital markets. We believe we have the people with the capabilities to handle this and the Government has given approval for us to proceed with the necessary upgrade to our system to help us keep pace.
CD: Can you tell me more about your review of Australia’s takeover laws? What issues and recommendations are you considering?
GM: Takeovers have been a high-profile topic for ASIC recently. We have been keeping an eye on developments in the marketplace and a number of recent high-profile cases suggest a review of some of the takeover provisions would be timely.
The takeover landscape is evolving. Financial innovation and complex instruments are having a direct effect on takeovers – for example, we have seen the rise of certain types of complex derivatives that are not captured by the relevant sections of the law. And, technological developments are changing how companies conduct takeovers – for instance, the effects of social media on continuous disclosure obligations have arguably led to vulnerabilities in the law.
In light of these developments, ASIC is examining whether our takeovers laws can be improved to keep up with the pace of change. We have raised a number of issues with Treasury that it could consider reviewing through a process of public consultation.
The first relates to the creep rule. Under the current provisions, a company that wants to buy more than 20 per cent of another company without making a full bid for it is limited by creep laws from buying more than three per cent every six months. This is somewhat out of line with other parts of the world. For example, creep was abolished in the UK in 1998 and Singapore only allows one per cent creep in six months.
There is also a question as to whether the ability to creep is fair to other shareholders of the company. We have concerns that this ability is being used by some investors to take control of companies without making a full takeover bid to all investors and without paying an appropriate premium for control.
We are also looking at reforms of substantial shareholding disclosures. Financial innovation has led to the increased use of derivatives to obtain control of companies. Derivatives can potentially be used to exploit the distinction between economic interest and legal interest for the purposes of substantial shareholding disclosure.
What we have put up for discussion is whether shareholders should have to disclose their holdings once they have an economic interest of more than five per cent in a company, even if some of the shares are held through derivatives.
ASIC has also become increasingly concerned that early control transaction proposals could undermine the market’s integrity. These are sometimes seen with the use of "indicative, non-binding, conditional" takeover proposals and raise continuous disclosure concerns for the board of the target company. They can also be used to pressure the board by making news of a potential takeover public. Other jurisdictions have imposed rules to limit this which we could examine – for example, the UK’s "put-up-or-shut-up" system.
We are also looking at improving consistency in takeovers. Section 631 of the Corporations Act 2001 is designed to ensure buyers must follow through with a takeover bid within two months of a proposal being announced. But there are some gaps in the law. For example, section 631 does not apply to an announcement of a proposed scheme of arrangement.
In raising these issues, we are talking about tweaking the rules, not conducting a complete overhaul. In our view, takeovers generally work well. We have not raised the idea of changing the 20 per cent threshold, nor other wholesale revisions.
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