The Regulator

Greg Tanzer outlines the rationale behind the Australian Securities and Investments Commission’s proposal for an industry funding model and the impact it could have on directors.

Rethinking the funding model

Over the past two years, the Australian Securities and Investments Commission (ASIC) has campaigned to change the way we are funded with the introduction of an industry funding model. This was a recommendation of the Financial System Inquiry (FSI) and the government has consulted with stakeholders on how this might work.

The background to our campaign is that the past 20 years has seen a large mismatch develop between the revenue ASIC collects and who pays it on the one hand, and the costs of the services we provide and to whom we provide them on the other. The size of our regulated population has increased and become more complex, yet funding has not increased accordingly. Only 15 per cent of ASIC’s regulatory costs are recovered through industry levies and fees.

The FSI recommended an industry funding model for ASIC’s regulatory activities designed to reflect the cost of regulation and incentivise sectors to better self-regulate. Similar recommendations were made in the 1997 Wallis Financial System Inquiry and the 2014 Senate Economics Committee review. The Government’s consultation paper last August aimed for a model that would:

• Ensure costs are borne by those creating the need for regulation.
• Establish price signals to drive economic efficiencies.
• Improve transparency and accountability.

Such a model would also bring us into line with other international regulators such as the UK’s Financial Conduct Authority, US Securities and Exchange Commission and Germany’s Federal Financial Supervisory Authority. Domestically, it would align with APRA’s funding model.

Consultation on the new model closed on 9 October, with Treasury receiving around 75 submissions. No decision has been made on ASIC industry funding. The Government has stated that it will make a decision on industry funding after it receives the report of the ASIC Capability Review.

ASIC is responsible for regulating a range of industries, including companies, credit licensees, financial service licensees, auditors, liquidators and markets. Industry funding for ASIC’s regulatory work would be collected from these groups through:

• Annual levies that reflect the portion of ASIC’s activities to each of its regulated sectors.
• Fees-for-service that reflect ASIC’s costs in providing specific on-demand services to entities.

The annual levies would be used to recover ASIC’s costs of undertaking surveillance; enforcing the law; providing guidance; developing advice for the Government; engaging with stakeholders; and certain activities educating consumers and investors. If an industry funding model were introduced, the Government proposes to recover around $54 million through levies. These funds would come from a large pool of around 2,000 listed public companies, 3,000 unlisted, disclosing public companies and 19,000 unlisted, non-disclosing public companies. There are also 9,000 large proprietary companies and 2.1 million small companies. Our work in this area centres on conduct and disclosure with a focus on corporate governance and transactions and financial reporting. To ensure each company pays a levy equal to the cost of regulation, the Government is proposing:

• An annual levy for public companies (listed, disclosing) based on market capitalisation; a flat annual levy for public companies (non-listed, disclosing).
• A flat annual levy for public companies (non-disclosing), large and small proprietary companies.

We understand that performance metrics should be improved to ensure ASIC manages costs transparently and efficiently and that ASIC should report against these metrics in its annual report. We also acknowledge concern that the model may impede ASIC’s independence – additional measures are required to minimise this risk. We have heard your concerns that small businesses are likely to be priced out of applying for novel relief applications. These are all important matters and ASIC looks forward to taking the funding issue forward.