ASIC has far too much on its plate
However, what it is telling us may be an argument for change given recent revelations about CBA's financial planning scandal.
After steadily expanding its areas of responsibility ASIC has arguably become too big to operate as efficiently as it could, and as it also makes clear in information sheets it has issued since Medcraft took over, it cuts its enforcement cloth to fit its budget. Dollars in hand are an important part of the cost-benefit equation that decides whether cases will be pursued, and if evidence exists, prosecuted or settled by way of an enforced undertaking that takes litigation financial risk off the table.
The risk is that money will be saved at the expense of taking the correct action, and on the strength of what my colleagues Adele Ferguson and Chris Vedelago have revealed in recent weeks about the misbehaviour of CBA advisers, ASIC let CBA off far too lightly by extracting only an enforceable undertaking in October 2011. It could have opted for tougher action that sent a message to the advisory industry that improper or illegal behaviour that enriches advisers at the expense of clients will attract significant penalties.
It was also slow to react, or at least from outside appears to have been. Almost a year-and-a-half passed between ASIC's first contact with a CBA whistleblower and the final elevation of the matter to a serious investigation in March 2010.
There are several contributing factors. First, while ASIC is an earnest and well-intentioned organisation, it has also become a regulatory dumping ground. It began life simply, as the overseer of corporate and securities law. Now, it is also overseeing areas including insurance, superannuation, credit markets, margin lending and business names, and is directly supervising the sharemarkets, having inherited that role from a conflicted ASX.
It's hard to think of much else that could be thrown at it, although Fairfax's crack investigators Nick McKenzie and Richard Baker may have found something with their report this week that in 2011 the Australian Federal Police passed on to ASIC a reference it had received from US anti-corruption investigators about allegations that people working for BHP Billiton made improper payments to officials in China, Cambodia and Western Australia.
ASIC has no jurisdiction to investigate bribery, but could look at possible associated corporate offences. If it did, it took no further action. AFP halted its inquiry in September last year, but reopened it in February this year.
Under Medcraft ASIC reports more frequently and fully on its enforcement activities and sets out how it is performing against various benchmarks.
In its most recent report covering the 2011-12 June financial year it says, for example, that it conducted more than 700 high-intensity "surveillances" during the year, and identified more than 20,000 market trading anomalies. It completed 179 enforcement actions with a success rate of 92 per cent, including 27 convictions and 22 enforceable undertakings, and fielded 12,516 reports of misconduct in the markets and industries it polices, finalising 72 per cent within 28 days, above its 70 per cent target.
It says it aims to satisfactorily answer all telephone queries on the spot, and in 2011-12 did so with 87 per cent of them, down from 91 per cent in 2010-11. It answered 91 per cent of its "snail mail" inquiries initially within 14 days and in full within 28 days. Responses to email inquiries within two days fell from 96 per cent in 2010-11 to 73 per cent, but that probably reflected the fact that it took over business names registration from the states during 2011-12.
It's noteworthy, however, that the regulator qualifies its 72 per cent success rate on responding quickly to reports of misconduct with the comment that reports that take longer than 28 days to resolve "are generally complex ones or ones requiring considerable additional work". Those are, of course, the ones that matter most.
It is also noteworthy that enforceable undertakings and, for that matter, banning orders for directors, stand with equal weight alongside wins in court in ASIC's 92 per cent enforcement success rate statistic. Actions of different calibre are lumped together.
That leads to a question, about whether the 92 per cent success rate is actually too high. If ASIC pushed for more litigation and less enforceable undertakings, the success rate would be lower, but ASIC would arguably be signalling its determination to stamp out misbehaviour more clearly.
Underneath it all, of course, Medcraft is running a complicated business, and running it to a budget. His task would be easier if ASIC had less on its plate: a new government might consider that. It would also have easier enforcement choices if there was more money to spend: a new government won't consider that.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
ASIC (Australian Securities & Investments Commission) is the corporate, markets and financial-services regulator. Since Greg Medcraft became chair in May 2011, ASIC has become more open about how it spends its budget and reports on enforcement. At the same time its remit has expanded beyond corporate and securities law to areas such as insurance, superannuation, credit markets, margin lending, business names and direct supervision of the sharemarkets.
According to the article, ASIC ultimately extracted an enforceable undertaking from CBA in October 2011. The regulator was criticised for being slow to escalate the matter—about a year-and-a-half passed between initial contact with a CBA whistleblower and a serious investigation in March 2010—and some commentators say the enforceable undertaking was too light and that tougher action could have sent a stronger deterrent message to the advisory industry.
An enforceable undertaking is a legally binding, negotiated agreement that lets ASIC secure remedies without going to court. ASIC counts enforceable undertakings alongside court wins in its enforcement statistics, which contributes to its reported 92% enforcement ‘success’ rate. Critics argue that lumping undertakings and banning orders together with convictions can make the success rate look stronger than if only court victories were counted.
The article notes ASIC has no direct jurisdiction to investigate foreign bribery. It could, however, examine possible associated corporate offences connected to bribery allegations. In the instance mentioned, the AFP passed a reference from US anti‑corruption investigators to ASIC in 2011 but ASIC did not take further action; the AFP later halted and then reopened its inquiry.
ASIC reported it conducted more than 700 high‑intensity surveillances, identified over 20,000 market trading anomalies, completed 179 enforcement actions (including 27 convictions and 22 enforceable undertakings), and fielded 12,516 reports of misconduct. It finalised 72% of those reports within 28 days (above its 70% target). Customer‑service measures included answering 87% of telephone queries on the spot, 91% of postal inquiries initially within 14 days and fully within 28, and email responses within two days fell from 96% to 73%.
ASIC finalised 72% of misconduct reports within 28 days and says items taking longer than 28 days are generally complex or require considerable additional work. The article highlights that these longer, more complex investigations are often the most important for investor protection.
The article argues that ASIC’s expanding responsibilities and limited budget force it to ‘cut its enforcement cloth to fit its budget.’ That means cost‑benefit considerations—how much money and litigation risk are involved—can influence whether ASIC pursues, prosecutes or settles a case, which has implications for how strongly misconduct is deterred and for investor protection.
If a regulator is spread across too many areas and has constrained funding, it may rely more on negotiated outcomes (like enforceable undertakings) and be slower to escalate complex matters. For investors, that can mean regulatory responses may sometimes appear less forceful than expected. The article suggests a government could consider narrowing ASIC’s remit or increasing funding to give it clearer enforcement choices, but it notes a change in funding is unlikely.
Call 1300 880 160
Start a chat
Schedule a call
