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Watchdog's failures cost victims dearly

The Australian Securities and Investments Commission suffers from a dual personality: regulating and assisting business while protecting investors, write Adele Ferguson, Ben Butler and Ruth Williams.

The Australian Securities and Investments Commission suffers from a dual personality: regulating and assisting business while protecting investors, write Adele Ferguson, Ben Butler and Ruth Williams.

It was a busy June day in 2010 when Jan Braund, a Sydney retiree, bundled herself and her frail husband, Alan, on to a train for their long-awaited shot at justice. A year earlier, the Braunds had been left financially ruined after a Commonwealth Bank financial planner, Don Nguyen, switched the couples' life savings from conservative to disastrously risky investments. He did it without their knowledge or permission, allegedly forging their signatures along the way.

The Braunds had been summoned by Australia's corporate and market watchdog, the Australian Securities and Investments Commission, to attend its Sydney offices and give an account of how Nguyen wreaked havoc with their finances and their lives.

Getting to the meeting was an ordeal. Alan, now deceased, had advanced dementia and could not be left alone. When the couple tried to exit the train, an exhausted and confused Alan tripped and fell after his leg got caught in the platform gap.

Jan, with a dossier of evidence of forgery and unauthorised transactions in hand, was determined to get to the meeting. She hoped it would lead to justice.

But, two weeks later, she received a call informing her that ASIC would not be using her evidence.

It later emerged that ASIC was tipped off about Nguyen's activities 20 months before the Braunds travelled to Sydney's central business district for their meeting. It waited until 2010 to launch an official investigation, which culminated in an enforceable undertaking with the bank in late 2011 and the banning of seven planners, including Nguyen. Criminal charges were never laid and CBA managers were never held accountable.

Braund's powerful account of that June day - and its aftermath - is set out in her submission to a landmark parliamentary inquiry that is scrutinising ASIC's performance.

Braund was one of many customers who received inappropriate advice from CBA financial planners and who were later compensated to the tune of $51 million.

Hers is one of hundreds of submissions to the inquiry lodged by lawyers, unions, victims, former staff, lobby groups, professional bodies, whistleblowers, government bodies and financial institutions. Some defend and praise ASIC but most are critical. A few are tragic.

"Not since my daughter's death, aged six-years, had I felt that awful, unpleasant, exhausting emotion and physical pressure," Braund writes. "The sheer futility of my efforts and the accident to my husband is something that I will always have on my mind with my ASIC dealings.

"They have no empathy with victims; they are unwilling to take on big players and consider no one has any value other than someone that works at the organisation. It seems that there is an organisational arrogance and significant cultural issues that seemed not to be addressed by the current management."

Her criticisms of ASIC are echoed by many who have interacted with the regulator - in one way or another - during its two decades.

In recent years, ASIC has routinely been described as a toothless tiger, a dog with no bite and a keystone cop when it comes to enforcement.

It has been criticised for being too slow to act, lacking transparency, being captured by the big end of town and having a "glass jaw".

But, most of all, its credibility has been questioned in relation to the court cases it has lost over recent years due to perceived bungling - AWB, One.Tel, Opes Prime and Westpoint.

Professor Michael Adams, dean of law at the University of Western Sydney, says that, in the AWB case, people were open to corruption and they got the "tiniest" slap on the wrist.

In the Reserve Bank currency notes scandal, they were missing in action.

This has been compounded by what seems to many to be a ruthless pursuit of a handful of small fry to build up their scorecard rather than taking on senior executives and directors in big companies over breaches of continuous disclosure.

Indeed, a high-profile barrister argues that litigation funder IMF Australia has become the de facto public corporate enforcement arm - done with about 20 staff, compared with ASIC's estimated 1900.

"IMF does not do enforceable undertakings in back rooms, nor take no prisoners. And they win," he says.

As CPA Australia chief executive Alex Malley says: "An effective regulator ... is the least investors should expect for their tax dollar. A review of functions, expectations and operations of ASIC is now well overdue and in the public interest."

The Senate inquiry, which was triggered by the CBA financial planning scandal and ASIC's belated investigation into a tip-off, was backed by all sides of politics.

ASIC will also be scrutinised by the upcoming financial system inquiry, which will examine the role, objectives, funding and performance of Australia's financial regulators, as confirmed in its draft terms of reference released this week.

They will both grapple with the big question that financially stricken investors have been asking for years: just what is wrong with ASIC?

Some say it has too much to do. In 22 years, its responsibilities have widened from financial markets and companies to include regulation of financial services for retail investors, direct supervision of consumer credit licensing and Australia's business names register.

Malley, whose organisation represents 144,000 members, points to the fact that ASIC has only recently moved to put a staff member into the Australian Federal Police's investigation into bribery and corruption allegations at listed construction company Leighton Holdings.

"It reinforces the view that it is an organisation spread too thinly," Malley says. "The AFP investigation has been under way for two years, and allegations about Leighton were given extensive airing in the Australian media again months ago, and yet it appears that it wasn't until last month that ASIC even entered into an MOU with the AFP."

Some say it needs more funding.

ASIC's funding is projected to drop from $357 million this year to $352 million in 2016-17, according to Treasury's submission to the inquiry.

It is one of the few regulators that earns more than it spends, the government pulling out more than $350 million a year in revenue, which makes it a powerful fund-raiser at a time of federal budget constraints.

ASIC's chairman, Greg Medcraft, has argued that its funding is insufficient to do everything expected of it, including keeping a focus on the small business sector and pursuing cases involving large companies.

Sources say it is frequently outgunned in spending on lawyers in big court cases.

When asked this week by Fairfax Media whether ASIC was adequately funded, Medcraft said ASIC was developing a user-pays funding model and was briefing parliamentarians on its proposal.

But some believe ASIC could be much smarter with the resources that it has. The Institute of Chartered Accountants, in its submission, says there are "many examples" where ASIC launches action in an area of need but fails to scale back its work once the issue's importance has diminished.

"It is the way Australian businesses are being challenged," says the institute's chief executive, Lee White, former chief accountant at ASIC. "We are being asked to do more with fewer or more limited resources."

Some of the submissions suggest that ASIC's culture has become highly process driven and bureaucratic. Anne Lampe, a former employee of ASIC, lodged a submission criticising the regulator for "springing into action" when the number of complaints by investors reached "tsunami" levels.

"When small investors lost money, ASIC seemed incapable of action or didn't think it necessary," she said. "However, if a corporation or big fish reported a trading irregularity, backsides came off their seats quickly."

One former senior executive says there is "a level of circumspection that [can] sometimes seem like inertia" within ASIC. But it is not that ASIC staffers do not grasp the urgency of the matter - it is that they are conscious of the impact of their actions.

"If you suspend a licence quickly before you have got all the facts and it turns out you didn't have a proper case, you have done that licensee irreparable harm," the executive says. "For the most part, ASIC's staff are very focused on public service and the greater good. They sweat it when people get hurt. There's a lot of grief and pain. There are a lot of people who care."

But ASIC's lack of transparency and openness is a recurring theme.

Would-be whistleblowers complain of contacting ASIC and passing on reams of information, then waiting for months for a response that never comes.

For Lampe, an issue is a decision by ASIC to negotiate enforceable undertakings instead of taking legal action.

"These undertakings were discussed and fought over, over months, by armies of lawyers in secret behind closed doors and few details ever emerged about how the damage to investors was done, how many investors were affected, or even whether the undertaking was adhered to," she says.

"In some cases, the companies involved undertook to write letters to affected clients asking them to come in and discuss their concerns. Whether these letters were sent, how they were worded, whether they were replied to or what compensation was offered stayed secret."

In the case of the CBA financial planning scandal, which resulted in the banning of seven planners who controlled hundreds of millions of dollars of clients' money, ASIC extracted a two-year enforceable undertaking in October 2011. The executives at CBA were never punished. Indeed, some continue to work at CBA or are now working in senior roles in other banks and wealth management operations.

Concerns about ASIC's lack of transparency and reluctance to explain its decisions have surfaced in everything from its reliance on enforceable undertakings to its lack of a freedom-of-information officer to handle requests to the most mundane interactions with the public.

In its submission to the ASIC inquiry, the Commonwealth Ombudsman sets out complaints about long delays in dealing with ASIC and scant explanations from the regulator about its decisions.

Even complaining about ASIC to ASIC is difficult.

"While ASIC's website contains a clear heading, 'how to complain', the subsequent list of links does not offer a clear and explicit opportunity to make a complaint about ASIC," the Ombudsman says.

Former Australian Competition and Consumer Commission chairman Allan Fels says a good regulator is one that acts without fear or favour. He says that, compared with the ACCC, ASIC's image is of a "far less proactive enforcer", particularly when compared with the Securities and Exchange Commission in the US.

"Over the years, there has been a less than total full-blooded commitment to applying the law vigorously," he says.

It is a comment not lost on Adams, who says the ACCC is tough on collusion and is not afraid to take on the big players or defend the small operators and consumers.

Fels believes ASIC has relied too heavily on enforceable undertakings, to the detriment of public interest. "They have become too much of a substitute for basic legal action," he says.

Not everyone agrees that ASIC's problems are deep-seated.

Bob Baxt, a lawyer and former chairman of the Trade Practices Commission, argues the current system is is "quite sound".

Henry Bosch, who was the chairman of the predecessor to ASIC, the National Companies and Securities Commission, says he has a "good impression" of ASIC.

"There is no industry that is perfect all the time but I think we are well served," he says.

Jeffrey Lucy, who was chairman of ASIC during the pre-global financial crisis boom between 2003 and 2007, points to ASIC's role, in 2008, in navigating Australia through the worst financial crisis since the Great Depression.

But the crisis showed there were cracks in the regulator as companies such as Babcock & Brown, ABC Learning, Allco and others unravelled. Thousands of retail investors were caught up in the collapses of Storm Financial, Timbercorp, Great Southern, Fincorp, Opes Prime, Trio and many others.

While Lucy may see the financial crisis as a triumph for ASIC, it prompted a deep bout of soul searching within the regulator about its role and philosophy.

And it is here that some experts say that the seeds of ASIC's problems can be found.

Since at least 1997's Wallis Inquiry, corporate regulation in Australia has been guided by the efficient market hypothesis - the idea that market players will make their investment decisions based on a rational assessment of risks and rewards on offer.

The emphasis was not on enforcement, or prevention of wrongdoing, but on disclosure - giving potential investors information about the risks and rewards of a particular venture.

And, as Australia boomed in the mid-2000s, the light touch approach seemed to be paying big dividends.

Negotiated settlements and enforceable undertakings became the enforcement tools of choice, with then chairman Lucy arguing they produced better results than taking corporate wrongdoers to court.

But the economic carnage wrought by the financial crisis threw the old certainties into doubt.

In 2009, with Australian losses from the crisis at $73 billion and still rising, then chairman Tony D'Aloisio bluntly said the disclosure regime and the efficient market hypothesis meant ASIC did not have the equipment to prevent catastrophic corporate collapses.

"Inevitably, ASIC will come in after a collapse has occurred," D'Aloisio said. "We are there, as an oversight body, to see if the law was complied with and, as such, we will arrive at the scene of the accident."

It was a theme D'Aloisio returned to the following year, saying that "it might be better to prohibit certain products from being offered to retail investors".

Now, five years after the financial crisis, ASIC is still talking about the pros and cons of the efficient market hypothesis.

In its submission to the Senate inquiry, ASIC points out that international regulators are now "looking for a broader toolkit" in grappling with market problems - away from disclosure towards "regulatory interventions".

Lucy admits the adequacy of the disclosure regime is "a very vexed question".

"We took the approach that we assumed that people were, in essence, overwhelmingly responsible, honest people," he says.

"I can think of a number of instances - [WA property scheme] Westpoint, a number that I was involved with - where our remedies were not much more than being able to go to the court and seek directions from the court.

"The regulator in Australia doesn't have the right to shut businesses down."

Melbourne Law School corporate law expert Dr Pamela Hanrahan, who spent three years at ASIC under D'Aloisio, believes ASIC's problems go back to the late 1990s, when, post-Wallis, it was given oversight of Australia's new financial licensing regime. She argues that the "big fundamental mistake" was that ASIC went about regulating financial advisers, stockbrokers, trustees and other financial service licence holders - many of which are entrusted with the savings of retail investors - with the same disclosure-based approach as securities markets.

"ASIC started off as a corporate governance and securities and markets regulator and that's a model which is all about the ambulance at the bottom of the cliff," Hanrahan says.

The problem was that the community expected those newly licensed by the 2001 reforms to be supervised, "or at least that regulators would intervene quickly to cut problems off when they were identified".

"The design flaw was to try and transplant the ex-post, bottom-of-the-cliff approach from the corporations and securities regime to this new financial services space."

The two areas of ASIC's responsibility are "apples and oranges" in terms of regulatory approach, Hanrahan says.

"ASIC's ongoing difficulty is that you [put] the apples and oranges in one basket and the current structure doesn't always appropriately distinguish the two."

Fast forward to this year and Australia's recent corporate history is littered with the carcasses of collapsed investment spruikers, who flourished under the light touch regulation model.

Among the most infamous are managed investments schemes such as Timbercorp, Great Southern Plantations, Banksia and Gunns, which have cost retail investors millions of dollars.

The crucial cogs in the MIS machines are the "responsible entities" - the companies charged with managing the schemes and protecting the interests of investors. They replaced trustees under laws brought in by the Howard government in 1998.

Managed investment schemes must be registered with ASIC but they are governed by the responsible entity, which is appointed by - and often closely related to - the company spruiking the MIS.

Niall Coburn, a former senior specialist adviser with ASIC's enforcement directorate from 2009 to last year, says allowing the responsible entity to control the fund and where the money is invested is like putting the devil in charge of the angels.

"There is no safeguard for investors," he says.

Coburn says he started looking at Gold Coast mortgage fund LM Investment last year and realised it had serious issues.

He said he told Medcraft directly but little happened until LM went into administration in March. ASIC declined to comment on LM.

Coburn blames the lack of ASIC's criminal convictions partly on the limited skilled staff capable of handling complex cases and an inability to prioritise projects.

He says in the case of Australia's largest superannuation fraud, Trio, ASIC didn't pursue money that disappeared overseas.

He says over the past few years more than $1 billion has been lost in MIS and there hasn't been one prosecution. "LM, City Pacific, MFS, Timbercorp, Equity Trust are just a few that have blown up," he says.

Perhaps one of the most complex cases of all was Babcock & Brown, dubbed a "mini-me" Macquarie Bank, which collapsed in March 2009, with debt across the empire totalling more than $40 billion. It later emerged that the company had compliance issues dating back to 2006 and that ASIC had sat inside Babcock for more than two weeks after a whistleblower had warned it about alleged conflicts of interest.

After its spectacular collapse, a report prepared by administrator Deloitte said directors "may" have breached their duties and the corporations law by operating the investment bank while it was insolvent and failing to get shareholder approval for a $40 million loan to controversial broker Tricom Equities, which almost brought the ASX to a halt when it failed to settle shares.

A well-placed source told Fairfax Media an investigation was still under way when D'Aloisio stepped down as chairman in 2011. But ASIC this week refused to provide any information on its progress.

Babcock's collapse was one of Australia's biggest. But even the smallest failure can have a tragic impact on those caught up in it.

Dianne Mead, who invested through troubled West Australian financial adviser WealthSure, said ASIC's failure to act "is nothing short of a modern day holocaust".

While ASIC has said that it is concerned that "WealthSure's commitment to compliance is inadequate" and has "recurring compliance deficiencies, despite previous regulatory intervention in 2006", in September it allowed the group to continue operating after agreeing to an enforceable undertaking.

Terry Gammel, a victim of Trio Capital, blasted ASIC's "failure" in investigating the $180 million collapse.

Gammel said he provided ASIC with detailed files in November 2010 but did not hear from them for another eight months.

He claims that, after a six-hour meeting, ASIC investigators promised they would give him a draft statement to sign in "around three weeks or so".

"It is now over two years later and I haven't heard one solitary word from ASIC despite my complete co-operation at all times, this extremely long meeting at my home and nor have I received any draft statement to edit and ultimately sign," he said in his Senate submission.

"If this is typical of the manner in which ASIC conducts its investigations, then it is becoming abundantly clear as to why ASIC is still struggling with its investigations into the collapse of Trio and the ARP Growth Fund."

Dennis Chapman, a victim of the 2008 collapse of Gold Coast financier Octaviar, formerly known as MFS, said he had gone from "complete financial security as a self-funded retiree to being forced to live on the age pension in impoverished circumstances". He told the Senate that while ASIC had taken action over MFS' main fund, it had shown no interest in MFS' MYF, a fund of just $2.1 million in which he had invested $200,000.

An "ASIC staffer has stated to me in telephone conversations that the MYF case quote 'is not in the public interest' and quote 'we are not in the business of getting your money back'," Chapman said.

Medcraft declined an interview with Fairfax Media but responded to questions. He says that, during his tenure, ASIC improved its transparency and has more clarity about its strategic objectives. He also says staff morale has improved.

D'Aloisio also declined to speak with Fairfax Media.

However, Lucy questioned some of the criticisms of ASIC being slow to act and defends the use of enforceable undertakings rather than legal action.

"Interestingly I can recall on Ralph Norris' [the former chief executive of CBA] first day at work, I called him in relation to what we regarded as inappropriate selling within the Aboriginal community by representatives of the Commonwealth Bank on commissions," Lucy says. "He responded to that instantly and, within a couple of weeks, he came back to me to say that full restitution had been made.

"So I think that to suggest that instances of complaints coming in that are not acted upon are not acted upon is just simply not the case.

"Not to say that all complaints are necessarily acted upon, because at the end of the day either there is enough for either a chairman-to-CEO telephone call, or, if it's in an investigation situation, it's all about admissible evidence and whether or not there are grounds to carry the investigation and ultimately start to prosecute.

"Prosecution, particularly white-collar crime, is incredibly difficult.

"It's just very expensive, very time consuming and, frequently, it's difficult to get admissible evidence."

The brutal reality is ASIC suffers from a dual personality: ASIC has to regulate and assist business and, at the same time, be a corporate watchdog. With a budget of $357 million a year, or $1 million a day, it is one of very few securities commissions that administer the corporate sector and are responsible for pursuing civil and criminal breaches of the law.

ASIC regulates and enforces laws governing investments, superannuation, insurance, deposit taking, financial advice, buying and selling shares and managed investment schemes. It also oversees the management of companies, company financial reporting, the raising of money, the lodgement of prospectuses and takeovers.

With the spotlight firmly on the inner workings, culture and calibre of staff, the words of D'Aloisio toasting the successes of its 20-year anniversary in 2011 will ring loud: "I believe the last 20 years have also seen the development of what I would call 'brand ASIC'. The perception of ASIC has, in my view, moved away from it being seen through a chairman or set of commissioners. ASIC is now a respected regulator with its own identity."

For the victims and the whistleblowers, brand ASIC needs work. As Jeff Morris, one of the whistleblowers who alerted ASIC to the CBA financial planning scandal, said this week: "The Don Nguyen scandal may turn out to be the loose thread that unravels the whole ASIC garment.

"Over 300 submissions to this Senate inquiry almost universally critical of ASIC, with common themes of inertia and incompetence, should sound the death knell for this dysfunctional organisation, or at least its current leadership.

"The range of scandals, scams and frauds that has stripped so many ordinary Australians of their life savings is breathtaking and they all happened on ASIC's watch.

"My own experience as a whistleblower laid bare to me the yawning gulf between ASIC's high-flown rhetoric and the cold reality of their miniscule achievements. Hopefully this inquiry will do the same for the Senate."


ASIC and its predecessor, the ASC, have had just six chairmen since 1993.

Greg Medcraft 2011-

Medcraft was previously deeply involved in the business of exotic securities as chairman of the American Securitization Forum and his job as a merchant banker at Societe Generale. Another non-lawyer, he was previously a chartered accountant with big four firmKPMG.


The then-opposition made much of his exemption from a Labor government policy

requiring senior positions to be advertised, with Liberal Senator Matthias Cormann – who is now Finance Minister – last year slamming Medcraft as a ‘‘personal appointment’’ by then treasurer Wayne Swan.

Tony D’Aloisio 2007-2011

While he was brought across from the ASX, where he had been chief executive, D’Aloisio’s appointment brought ASIC back under the control of a lawyer – he was previously a partner at Mallesons.

D’Aloisio had to deal with the wave of collapses brought by the GFC. He introduced the ban on short selling and oversaw the investigation into failed broker Opes Prime.


D’Aloisio’s purchase of a Yarra Valley winery from a failed company seven months after his appointment was scrutinised by the media.

Jeff Lucy 2004-2007

Lucy, a former PwC partner in Adelaide, was the first non-lawyer to run ASIC. He espoused a light-touch style of regulation. Under his reign Rodney Adler and Ray Williams of HIH were jailed and probes began into Westpoint and James Hardie.


ASIC’s failure to chase criminal charges against Steve Vizard over insider trading in 2005 drew widespread criticism.

David Knott 2000-2003

Another former Allens partner, Knott oversaw the introduction of financial services licenses under then-Assistant Treasurer Joe Hockey. Picked a fight with the ASX over its supervision of continuous disclosure, which he said was compromised by its for-profit status.


Knott’s early resignation coincided with publication of details of a $16.7 million tax scam run by his former legal practice partner, Ian Collie, when they were in partnership.

Tony Hartnell 1991-1993

As inaugural chairman, Sydney lawyer Hartnell took on the job of replacing a patchwork of state agencies with national regulator the Australian Securities Commission. He said the ASC’s goal was ‘‘to establish a climate of compliance, ethics and responsibility’’. After serving his term he returned to private legal practice.


Hartnell’s old law firm, Allens, gave him a $100,000 a year ‘‘gift’’ to top-up his $190,000 a year public sector salary. Hartnell didn’t disclose it but was later cleared of wrongdoing by a parliamentary inquiry.

Alan Cameron 1993-2000

Former Commonwealth Ombudsman Cameron oversaw the transition from ASC to

ASIC in 1998, following the Wallis Inquiry. In 2000, he told staff ASIC would narrow its ambit to pursue only ‘‘outright spivs’’. He is now chairman of the stock exchange’s

licensing arm, ASX Compliance.


Despite an investigation lasting four years, ASIC was unable to get to the bottom of the Yannon transaction, a complex deal involving Coles Myer and billionaire Solomon Lew.

Making the grade?

Submissions to the Senate inquiry

Under its current leadership, the organisation has increasingly isolated itself from its key stakeholders … ASIC is now defined by a combative, compliance focused

approach which, on its chairman’s own admission, places a premium on “leveraging” media headlines over substantive outcomes.

-- CPA Australia

ANZ wishes to acknowledge that ASIC works constructively and positively with ANZ and industry to implement many areas of new regulation or programs which manifestly improve consumer and market outcomes.

-- ANZ Banking Group

What a waste of tax payers hard earned money.

-- Ocean Financial Limited

ASIC’s failures cannot be blamed on budgetary constraints, given ASIC’s apparent profligacy in the deployment of public money spent on, or in outsourcing legal services.

-- Levitt Robinson Solicitors

We need to see ASIC made accountable for what they didn’t do to protect investors at CFPL and we want to see [Peter] Kell and [Greg] Medcraft dismissed. Some justice has to prevail or else Robyn and I have gone through all of this for nothing.

-- Merv and Robyn Blanch (victims of CBA financial planning arm)

ASIC is in the position of having a wide enforcement portfolio that is trying to

investigate and prosecute 21st Century economic and investment crime with 19th

Century legislative tools that are outmoded, slow and incapable of protecting

the interests of Australian and international investors.

-- Niall Coburn (former executive at ASIC)

ASIC, as a regulator, needs to be clearer on its regulatory approach and style… ASIC’s substantial powers appear to act as a disincentive to establishing

collaborative relationships with industry. The result is that ASIC seeks rectification

\ enforcement after a regulatory breach has occurred, as opposed to the

prudential stance adopted by APRA.

-- The Association of Superannuation Funds of Australia

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