ASIC chair James Shipton on increasing regulator scrutiny

Friday, 29 June 2018


    ASIC chair James Shipton on how the regulator needs to improve its enforcement performance in light of banking Royal Commission revelations.

    The trust deficit

    “The Royal Commission has highlighted the costs and consequences of financial services misconduct; the totally unacceptable and widespread practice of charging advice fees where no advice was provided. The hearings have also highlighted unacceptably poor levels of self-identification, transparency and disclosure by the industry in identifying, reporting and dealing with misconduct. This goes to the heart of a trust deficit facing the financial services sector and, more broadly, corporate Australia. This current predicament is of the sector’s own making, and so the sector must be held to account and take responsibility for its repair.

    The Australian Securities and Investments Commission and other regulators have a crucial role to play here, too. Ultimately, trust can only be restored if these companies work root and branch to change their ways… to rebuild their culture from deep within. In addition to the regulatory and enforcement roles of ASIC, it is essential investors, and particularly organisations like Australian Council of Superannuation Investors ACSI) that represent them, focus their efforts on holding industry to account for malpractice, malfeasance or unacceptable harm to consumers.

    In recent times, we have seen the important role that investor engagement has played in influencing corporate behaviour. The sustained engagement and active stewardship of assets by investors will be fundamental to restoring trust, better governance and good corporate culture in Australia.

    Culture and systemic conflicts of interest

    My concern is that many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten it is about managing other people’s money. I worry that many financial services companies have become insular by focusing only on how they can maximise earnings.

    Accordingly, the first job of the sector is to refocus on these core purposes, instead of exploiting opportunities to make money from its customers, often to the consumer’s considerable detriment. This is exemplified by the proliferation of conflicts of interest in parts of the financial sector. It is clear to me that a number of institutions have not taken the management of conflicts of interest to heart. This is verging on a systemic issue. What has surprised me is that:

    • Many Australian financial firms have turned a blind eye to the risks conflicts pose to customer outcomes as their businesses evolved
    • They didn’t have a management system, a management culture, or codes that were attuned to identifying and resolving conflicts
    • There has been reluctance, and often resistance, to addressing conflicts — even when ASIC pointed them out. This resistance has, at times, extended to a reluctance to make good any harms caused by conflicts. Too often, unacceptable conflicts were justified on the basis that “everyone else is doing it”.

    A business culture blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law. It is time for Australia’s financial services sector to remember its purpose. There must be a wholesale review by firms to identify, manage and, if appropriate, remove every conflict.

    Regulatory system

    Whilst ASIC and our fellow financial regulators sit at the heart of the regulatory structure, the system was deliberately designed to have a number of regulatory mechanisms and a range of compliance agents in addition to the regulators themselves. This structure is designed to have, as the “first line” of compliance, the firms themselves. This is the law of the land, but this has not been observed by firms. And a firm’s failure to live up to these obligations ultimately impacts on the effectiveness and fairness of the entire financial system.

    One of the fundamental roles of regulators is to intervene when firms fail in their first-line regulatory responsibilities. Let’s also be held to account in regard to this — let’s talk about our law enforcement outcomes in holding firms and people to account.

    Whilst we have been trying to do our job, too often the firms who have failed in their first-line responsibilities have made matters worse by not cooperating with us and, in some cases, actually obstructed our work. These firms have not just failed in their first-line compliance, they have jeopardised the entire regulatory structure — and endangered the financial system they are meant to support.


    The Australian regulatory system was not constructed to license individuals performing financial services roles. Accordingly, for this regulatory setting to achieve fair, honest and efficient outcomes, the people in finance need to refocus on building a highly professional and ethical mindset. For this to occur, employing firms, and the sector more broadly, need to have professionalism as their gold standard.

    Our call for greater levels of professionalism is not an abrogation of our important regulatory role. We stand ready to deploy all the regulatory and enforcement tools available to us. The industry and the people within it need to do more to support the proper functioning of the financial system and its regulation. They need to take a true and accountable leadership role in promoting professionalism. The financial industry needs to demand more of itself — and its people.

    The ASIC role

    ASIC must confront and respond to harms and misconduct in the financial sector. ASIC strives to do its job in the best way possible within the legislative framework and in the face of continual changes in the corporate landscape. We need to critically evaluate our performance and must continue to explore new ways to do our work, especially via the adoption of new regulatory tools and approaches. These include:

    1. Enforcement
      • Significantly stronger and clearer rules about the obligation of licensees to report breaches to ASIC honestly and in a timely manner
      • A stronger ability for ASIC to take regulatory action against senior managers or controllers of financial services businesses
      • A “directions power” to enable ASIC to direct licensees to take particular remedial actions such as consumer compensation programs
      • Stronger penalties for licensees.
    2. Funding from our Enforcement Special Account has been utilised to fund a “Wealth Management Project” focusing on the financial advice sector. It included a number of investigations on financial advice in large financial institutions. Much of what we saw in the financial advice round of the Royal Commission hearings was based on the work of this project. We intend to expand this intense program. We are also looking at ways to build on our substantial enforcement outcomes. This will help accelerate our response times.

      The government has also announced it has accepted/agreed in principle to all of the recommendations of the taskforce that reviewed ASIC’s enforcement powers. These reforms include:

    3. Supervisory approaches
      • Risk-based surveillance aimed at a particular firm or transaction
      • Thematic reviews considering how a particular issue is addressed.
    4. ASIC currently supervises firms it regulates through:

      Over the coming years, we will improve on this work by adopting new supervisory approaches.

    5. Adopting regulatory technology (regtech)
    6. ASIC believes Australia can position itself as a world leader in the development and adoption of regtech solutions. These solutions will be key to overcoming the conduct challenges facing Australia’s financial industry and have the potential to promote better consumer outcomes.

      ASIC is already engaging with the regtech and fintech sectors to promote opportunities to collaborate and share information on regtech. The extent to which we can develop these initiatives will depend on our capability and level of resourcing.

      In my current assessment of Australia’s financial system, there is a real need for new regulatory approaches. Ultimately, our aim is a fair, strong and efficient financial system for all Australians. The industry’s job is to support and reinforce this. So, let’s all get on with it!”

    To read further coverage of the Royal Commission, click here and here.

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