A matter of confidence

John Price considers the balance between growth and stability and encourages boards to challenge the assumption that regulation inhibits innovation.

The Australian Investments and Securities Commission’s (ASIC’s) annual forum this year focused on “Creating confidence to grow” particularly around the balance between growth and stability and challenging the assumption that regulation inhibits innovation. The forum also looked at how consumer trust and confidence can be boosted to increase participation in our financial system.
ASIC chairman Greg Medcraft’s three takeaways from the event related to culture, regulating for human behaviour and digital disruption.

Culture

Many sessions emphasised the need to put customers first. Not just merely paying lip service to this concept but putting it in practice at all levels.

In Australia, confidence in the financial sector has been eroded following a number of well-publicised matters. Boards and their senior managers need to consider if their approach and decisions will generally pass the “front page test”.

Former Citigroup chief executive officer (CEO) Vikram S Pandit, in his address Creating confidence – the international dimension, posed three questions boards should keep front of mind when making decisions:

• Is it in my client’s interests?
• Does it create economic value?
• Does it contribute to systemic stability?

Good organisational culture is imperative to building investor confidence and consumer loyalty. It is the board of directors’ that will define and encourage culture in an organisation. There is the risk poor culture may expose an entity to reputational harm and in some cases directors may also suffer personal reputational harm. If entities do not respond to demands for cultural shift, they risk losing customers.ASIC is looking to boards to provide the leadership to affect good cultural change in entities.

Human behaviour

Creating confidence to grow requires regulators and regulation to respond to human behaviour, so investors and consumers have the tools to make decisions. As humans, we rarely make objective decisions, we are influenced by biases such as experiences, nature and expectation.
As we expect directors to provide leadership in directing an organisation’s culture, we also expect they will seek to manage their product offering and engagement with investors and consumers.

The ASIC chairman noted there were a few aspects to regulating human behaviour:

• That risk in the market must be properly priced. It is not possible to mandate the stability of the financial system to preclude potential failure – instead, decisions must be made on the level of risk and regulatory oversight acceptable to the market. Regulatory parameters must be set accordingly.
• The competing tension of risk and greed. In business there is an inherent risk some may wish to profit at the detriment of others. Some do not act on this for fear of getting caught. Therefore ASIC enforcement action, criminal or financial penalty, is important to act as a deterrent.
• Behavioural biases. Research has shown many investors will become disengaged when faced with complex financial products and plans. The type of default settings in investment and superannuation products is therefore very important.
• Appropriate use of ASIC resources. Independent and adequately funded regulators create trust and confidence in the market. Accordingly, ASIC is pursuing a user-pays funding model so those who participate in Australian markets pay a fee commensurable to the cost of ASIC oversight, to incentivise them to meet the community’s expectations for their sector.

Digital disruption

ASIC recognises the increasing potential for digital disruption in markets and companies. Where there is low trust and confidence in some service providers, significant technological innovations are increasingly empowering consumers and investors such as through the use of social media.

ASIC is also keen to help innovative businesses through the development of an innovation hub, which will have a small- and medium-sized entity focus.