Address to the Financial Services Council on the Direction of Financial Services Policy in Australia

Address to the FSC on the Direction of Financial Services Policy in Australia - Andrew Bragg - Senator for New South Wales - 15 Minute Address

We are fortunate to have one of the most advanced financial systems anywhere in the world. Complementing this system is a regulatory framework which balances the need to protect consumers and promote investment.

Australia has led the world on financial sector regulation. However after 25 years of the Twin Peaks model, it is clear there are major structural problems that the Parliament must address. Put simply, we risk losing our position which will cost jobs and innovation and drive up costs for consumers.

ASIC

Since October 2022, I have chaired an Inquiry through the Senate Economics Committee into the Australian Securities and Investments Commission (‘ASIC’).

This Inquiry is critical, because it has been apparent for some time that ASIC has deviated from their sole mandate: the enforcement of Australia’s corporate law.

ASIC spends a lot of time promoting themselves and deflecting criticism in the media. ASIC says its enforcement record is stronger than ever, on the basis that they have had courts impose over $500 million in civil penalties as result of their civil actions.

But the reality is that there are very few criminal convictions achieved in Australia for breaches of corporate law. For some people, Australia is a haven for white collar criminals.

Indeed the data given to the Committee by the Commonwealth Director of Public Prosecutions revealed that the rate of prosecutions initiated from ASIC referrals had plummeted from 75% in 2018 to 19% in the last financial-year.

Furthermore, the amount of overall referrals from ASIC have halved in that time. In the last financial year, it was revealed that even the Great Barrier Reef Marine Park Authority had made more referrals to the CDPP than ASIC.

But as it would turn out, this was just the tip of the ASIC iceberg. Over the last 16 months, what we have uncovered has been deeply disturbing.

A clear pattern of behaviour has emerged:

1. Individuals raise concerns about corporate misconduct with ASIC;
2. ASIC fails to act;
3. Consumer harm results, as misconduct is allowed to continue; and
4. ASIC acts only after consumers have faced the consequences, if at all.

Regrettably, we have also found that the media drives enforcement. If ASIC is afraid of media coverage, it will move.

ASIC also devotes substantial resources to lobbying for new laws rather than enforcing those already on the statute books. A clear example of this are the new wholesale investor reforms that ASIC has been lobbying the Government to amend to expand ASIC’s already enormous remit.

Throughout the Inquiry, ASIC has shown a consistent unwillingness to comply with the work of the Senate. I remind you that the Senate’s job is to inquire!

We found out through Freedom of Information that when the terms of reference of the Inquiry were being considered by the Senate in October 2022, ASIC’s media team discussed giving Dorothy Dixers to Members of Parliament to deflect parliamentary scrutiny.

In sum, ASIC is not a feared law enforcement agency.

Today, I want to tell you about two notable cases.

The first of these cases is Nuix. In 2020, there was much hype around the public listing of Nuix, with it being billed as the largest float of 2020.

ASIC received multiple warnings that the prospectus may have been defective in November 2020. The IPO occurred on 4 December 2020.

Company insiders from Nuix tried to report this conduct to ASIC. But even when presented with credible warnings it took ASIC eight months to even respond to these complaints with no action.

During this time, ASIC began receiving reports of insider trading at Nuix. ASIC dropped their case against Nuix, because of insufficient evidence. ASIC noted in a submission to the Committee “while we were aware of substantial circumstantial evidence in this case, we considered the evidence to be insufficient to refer the matter for consideration of criminal charges.”

ASIC didn’t refer the Nuix insider trading cases to the CDPP despite ASIC’s own belief that it was, in their own words, “suspicious”. ASIC’s voluminous submissions to the Inquiry set out their suspicions.

Why wouldn’t the corporate cop try a case like this? It’s weak and it erodes confidence in our markets.

By failing to respond to these complaints early, ASIC becomes entirely reactive to corporate malfeasance, and it becomes too late to prevent consumer harm.

The real-world impact of ASIC’s inaction on Nuix caused losses of around $650 million for mum and dad investors.

The second is the curious case of Dixon Advisory.

Between 2013 and 2023 ASIC received 46 reports of misconduct and three breach reports about Dixon Advisory. Further reports were received by representatives or associate entities of Dixon.

ASIC only commenced their investigation years later, in 2019.

In September 2022, the Federal Court found that on 53 occasions between 2015 and 2019, authorised representatives of Dixon Advisory did not act in the best interests of clients when advising those clients to invest in the US Masters Residential Property Fund.

The fine levied on Dixon Advisory was only $7.2 million. ASIC has since admitted that they do not expect this fine to be paid since Dixon Advisory went into administration in January 2022. There are allegations that Dixon Advisory may have engaged in illegal phoenixing at this point.

AFCA has given evidence to the Senate that they have received more than 1,900 complaints on the collapse of Dixon Advisory, and the losses claimed total $374 million. Compared with the consumer losses, the measly unpaid $7.2 million fine is hardly justice. This is a non-binding speeding ticket.

When you add the soon to be established Compensation Scheme of Last Resort (CSLR) to the mix, the case of Dixon becomes even more concerning.

I have long felt that the CSLR introduces a moral hazard to our financial regulatory framework. If there is a compensation scheme there to de-risk our financial markets, then ASIC may be incentivised to be less forceful in enforcing the law.

Thanks to the CSLR, the cost of compensating former Dixon clients will be borne by taxpayers and other financial market participants.

In the case of Dixon, ASIC has completely abrogated its responsibilities as a corporate regulator and law enforcement agency, and passed the buck to the Australian people.

The cases of Nuix and Dixon demonstrate just how far ASIC have deviated from their mandate of regulating corporate misconduct.

During our Inquiry, ASIC consistently and repeatedly attempted to block the Senate from examining documents relating to their enforcement processes.

When the Senate requested case files from closed cases, ASIC refused, as they didn’t want the Senate to see their “investigation methods”. It is laughable that ASIC would work to prevent the house of review from keeping ASIC accountable. But with the support of the Labor Government, that’s exactly what ASIC did.

The Senate‘s job is to inquire. That is our job under the Constitution and we can’t allow a dysfunctional agency to undermine our investigations. We will address the obfuscation in our final report.

This secrecy wasn’t limited to ASIC’s approach to corporate law enforcement. During our Inquiry, ASIC refused to provide disclosures relating to governance issues at the corporate regulator.

For eight months, ASIC withheld information from the Senate relating to a $200,000 investigation into the conduct of a Deputy Chair of ASIC.

When I initially asked about this investigation, ASIC denied it occurred, only to backflip 30 minutes later.

It was subsequently revealed to the Committee that the Secretary of the Treasury wrote to the ASIC Chair in February 2022 informing him that the Treasury “investigation found that many of the instances of alleged conduct could be wholly or partially substantiated”.

Even when ASIC can’t handle their current caseload, or manage their internal affairs, they are still pushing the government to give them more power.

In recent weeks it has been reported that ASIC has recommended the government increase the threshold to qualify as a sophisticated investor, from $2.5m to $4.5m in net assets.

Increasing the threshold could damage start-up and angel investment in Australian businesses.

It doesn't seem right to hand more power to a regulator which is already struggling.

By my account, there hasn’t been a decrease in corporate crime over the last five years. So it begs the question: why ASIC is seeking to expand its remit even further when it is incapable of managing its current caseload?

This year we report to the Senate. We won’t make the same mistakes as the virtually identical Bishop and Ellison Inquiries of the past few decades. We will not miss the opportunity handed to the Senate just once a decade.

Our recommendations will be incredibly strong and will be crafted in a way that any party, not just the Liberal Party could adopt.

APRA

Whilst I have been concerned about the performance of ASIC for some time, I am growing increasingly concerned with the performance of the Australian Prudential Regulation Authority (‘APRA’).

My concerns started from APRA’s failure to clamp down on breaches of the best financial interests duty (‘the BFID’).

The BFID was implemented as part of the former Liberal Government’s ‘Your Super, Your Future’ reform package. It requires super funds to demonstrate that their investment decisions are in the best financial interests of their members.

This shouldn’t be controversial.

When Australians pay super, they expect it will be used to benefit them in retirement.

But Big Super believes that your super belongs to them and their fellow travellers in the union movement and Labor Party.

For decades, we have witnessed Big Super use your money for propaganda advertising blitzes and large payments to unions.

The BFID was designed to put an end to these dodgy transactions, but so far they have continued.

The Explanatory Memorandum to the Your Future, Your Super legislation clearly states that “expenditure on items that are not supported by identifiable financial benefits to members articulated in a clear business case, are unlikely to satisfy the requirements of the best financial interests duty”.

This expenditure has been running rife since the election of the Albanese Labor Government.

One of the first acts of the Albanese Labor Government was to repeal these arrangements.

Early last year, the Senate disallowed the Government's attempt to cover up these payments.

Last year, I exposed how super funds gave unions $8m during the 2021-22 Financial Year. When I raised these payments with APRA in May 2023, they told me there was a ‘formal investigation’.

Fast forward almost nine months, I am still awaiting the outcome of APRA’s formal investigations.

In May last year, APRA said at Estimates, “I'm going to … carry on telling you that until we've reached a conclusion we can tell you about.”

In October last year, they said “We have been investigating, as I think you know, since earlier this year. We do want to be thorough. I can't give you an absolute date, but we are getting on with it, I can assure you.”

Last week, APRA said “We have talked before about an investigation that we have ongoing. We have not named the fund, and that investigation continues. I am not going to talk in terms of specifics about that investigation because we don’t go into entity-specific matters here”.

I’m glad APRA says the right things on this issue but what are they actually doing about it? I’ve learned the value of heads on spikes as a deterrent.

The disclosures revealed that in the last Financial Year (2022-23) just 10 super funds made over $15m in payments to unions and over $21m to the now defunct Industry Super Australia.

Furthermore, the Financial Regulator Assessment Authority (FRAA) found last year that APRA’s supervision of super fund evaluation practices of unlisted assets was deficient. Inaccurate valuations of unlisted assets inflates the fees paid by members, and benefits older members at the expense of younger members in the accumulation phase.

Regrettably, Labor wants to reduce the review cycle of the FRAA for APRA and ASIC from two years to five years. This means that we will see less oversight of the performance of the corporate regulators.

This is a bad idea.

There should be an emphasis on ensuring law enforcement here rather than establishing new laws.

At Senate Estimates, I raised the matter of The New Daily with APRA, a media outfit owned by the industry super funds that has consistently made bad returns. Funds invest in The New Daily through opaque investment structures that APRA has failed to reign in.

When querying why APRA has failed to take action here, they told the Committee:

“We don’t we feel have jurisdiction to pursue the matter of The New Daily and its losses issue.”

It is clear to me that if the laws were being enforced as intended, these investments would not be allowed to continue.

Time for an FSI

It is obvious that the twin peaks model has had its day. Peter Costello’s structure has served the country well but the Government has missed so many strategic opportunities. A recalibration is needed.

In the past, this has been achieved through a Financial System Inquiry (‘FSI’).

In the past, FSIs have been used to drive bold reform to the financial services sector. Each inquiry has had the broad mandate of assessing the efficiencies of the financial system and looking how it can be improved.

The Campbell Committee Inquiry, commissioned during the Fraser Government, made the recommendations that paved the way for deregulation, including the floating of the dollar.

The Wallis Inquiry, commissioned during the Howard Government, recommended the twin peaks model of regulation, to increase market efficiencies and consumer protections.

The Murray Inquiry, commissioned during the Abbott Government, recommended stronger capital reserves for banks and the need to embrace FinTech. The Turnbull Government accepted almost all the recommendations, and many have now been implemented, including:

• additional powers for APRA relating to crisis resolution for regulated entities;
• clearer graduated payments regulation;
• a financial product design and distribution obligation; and
• product intervention powers for the corporate regulator.

The former Coalition Government implemented these and the bulk of the Hayne Royal Commission recommendations.

It has been almost a decade since the last FSI. Given the litany of issues with twin peaks and the clear deficiencies with the present regulatory enforcement, Australia should have another FSI.

This presents an opportunity to embrace the issues missed by the RBA Review such as payments, and thread together the structural issues canvassed in the Senate’s ASIC Inquiry.

The geopolitical and strategic issues missed by the RBA Review warrant an FSI on their own. It was a narrow review.

Payments could be the single biggest disruptive force for the financial sector and the broader economy and the Labor Government has no idea how to handle it.

Furthermore, there have been reviews into the consulting and auditing sectors after the recent PwC debacle. The Corporations Committee has been running an inquiry into these sectors. There’s a risk Labor could destroy professional services.

We want to ensure ethical conduct and proper oversight of the professional services firms, but we don’t want to see its destruction as a sector. In 2019, the Committee ran a similar inquiry into auditors and made several sensible recommendations that have yet to be implemented. This is a strong starting point.

Combined with the nation’s failure to move on digital assets and financial sector reform more generally, it is hard to argue against an FSI.

Perhaps the most compelling argument for an FSI is the massive influence of the superannuation system over the financial system and the economy and markets.

The Murray Inquiry focused on traditional banking but the super system is now large enough to influence the economy and spur crony capitalism.

That’s why I have previously flagged a 10 per cent cap on ASX listed entities by APRA regulated super funds. This is a debate we have to have.

At a minimum, an FSI would:

• Undertake a proper review of payments which looks at economic and geostrategic matters collectively;
• Examine the tax points in the sector to ensure competitiveness and efficiency;
• Specifically look to how the financial sector arrangements may be recalibrated to help solve our great national challenge of housing younger Australians;
• Consider the influence of superannuation over the economy;
• Look for opportunities for deregulation such as duplication which exists in prudential standards and legislation - including responsible lending;
• Consider the value of standardised terms and consumer disclosures; and
• Consider the overall regulatory architecture, the “regulator of regulators” and the role of the Council of Financial Regulators.

The opportunities for the country from the disruption of digital and payments are clear but we could easily miss the opportunities and they will quickly become unmanageable risks.

We need vision to capitalise upon the opportunities and maintain our base as a regional hub for financial and professional services. I thank you for your contribution to this strategically important sector for Australia.