What directors need to know about ASIC's new supervisory approach

Thursday, 01 November 2018

John Price photo
John Price
Commissioner, Australian Securities and Investments Commission

    ASIC will use a new approach to ensure a more responsible attitude towards decision making in the financial services industry.

    The Australian Securities and Investments Commission has many important roles. It is a regulator, a policy advisory body, a consumer protection agency, a licensing body, a financial educator and consumer advocate, and a company and professional registry. But above all, ASIC has a critical role as a law enforcement agency. We identify possible breaches of the law, investigate them, identify those possibly responsible, determine the sanctions to pursue (including possible criminal action) as appropriate, and work to achieve outcomes through the combination of deterrence and supervision. All this is directed to one principal aim: to realise our vision for a fair, strong and efficient financial system for all Australians.

    The Australian government recently announced a significant $70.1 million funding boost to help ASIC implement new supervisory approaches. It will improve ASIC’s supervisory capabilities and enable it to undertake new regulatory activities, so as to better deliver on our mandate of combating misconduct in corporations and in the financial services industry. The funding covers a number of initiatives to support our new supervisory approach, including the closer familiarity with governance systems and structures in the corporate sector, and better use of data held by us or by the Australian Prudential Regulation Authority (APRA).

    We will implement a new and more intensive supervisory approach by regularly placing ASIC staff onsite in major financial institutions to closely monitor their governance and compliance with laws — we call this new program of work “close and continuous monitoring”.

    One goal of this new approach is to modify the behaviour of the large institutions to ensure they place consumers first in their decision-making and quickly identify and respond to conduct that produces unfair outcomes. Although new to Australia, these approaches have been undertaken to good effect in other jurisdictions.

    We will implement a more intensive supervisory approach by regularly placing ASIC staff onsite in major financial institutions to monitor their governance and compliance with laws.

    The initial focus of these supervisory teams will be to drive significant improvements to financial services breach reporting, which is, in many ways, the key to improving corporate behaviour overall. The record shows that it takes far too long for a breach to be detected, acknowledged internally at a sufficiently high level, let alone reported to ASIC within the required time frame.

    This must change. Our system follows the “gatekeeper” model. At its heart is the obligation for those at the coalface of our financial services industries to maintain a rigorous oversight of their systems and people, and to quickly report and correct occasions where standards slip.

    I would like to dispel one misconception from the outset: these teams will not be on secondment. ASIC has and will continue to use secondments as a valuable way of upskilling our staff and broadening their knowledge of industry practices, but this is different.

    A secondee performs work for the institution they are assigned to. These teams will be ASIC staff, working for ASIC at all times and in place to observe the institution’s values and performance, and enforce ASIC’s expectations. They will not be permanently in place, but rather as required — for several weeks, mostly — depending on our particular focus and priorities at the time. We operate in a dynamic environment, and the flexibility with which we can identify potential problem areas and address them will be key to the success of this approach.

    Our new supervisory approach will initially involve the big four retail banks and AMP. Following an initial focus on breach reporting, future areas of focus will be selected based on the potential for consumer harm, as well as other factors such as the suitability for intervention through onsite supervision and issues identified and/or resolved in other jurisdictions.

    We believe this initiative will change the mindset in the thinking of decision-makers inside financial institutions. Any decision-maker inside a financial institution who interacts more regularly with a senior ASIC officer, will have regulatory issues — the physicality of the regulator, almost — firmly in front of mind.

    What we believe is important is that when decisions are being made inside a financial institution they need to have a diverse range of different inputs. The institutions need to be considering: “Can we do this? Should we do this? What is in the best interests of the consumer or the customer?”

    It is difficult not to conclude that a large part of the failures of the financial system in recent years is that this type of thinking, this type of dissonance, this type of questioning was not apparent in the decision-making rooms of financial institutions. We at ASIC are working to change that.

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