Strengthening Australian Securities and Investments Commission's funding and powers

Recommendation 29

Introduce an industry funding model for Australian Securities and Investments Commission (ASIC) and provide ASIC with stronger regulatory tools.

Description

Government should recover the cost of ASIC's regulatory activities directly from industry participants through fees and levies calibrated to reflect the cost of regulating different industry sectors. Government would continue to set ASIC's overall funding needs. However, this would be done through three-yearly funding reviews.

Government should strengthen the Australian Credit Licence and Australian Financial Services Licence (AFSL) regimes so ASIC can deal more effectively with poor behaviour and misconduct. ASIC should be able to consider all relevant factors in determining whether or not a licence should be granted. ASIC approval should be required for material changes in the ownership or control of a licensee. Finally, ASIC should have more capacity to impose conditions requiring licensees to address concerns about serious or systemic non-compliance with licence obligations (including expert reviews).

The maximum civil and criminal penalties for contravening ASIC legislation should be substantially increased to act as a credible deterrent for large firms. ASIC should also be able to seek disgorgement of profits earned as a result of contravening conduct.

Objective

  • Ensure ASIC has adequate funding and regulatory tools to deliver effectively on its mandate.

Discussion

Problems the recommendation seeks to address

Industry funding

At present, Government only recovers a small proportion of ASIC's costs directly from industry participants, through the Financial Institutions Supervisory Levies, application fees and fees for market supervision. The absence of industry funding means ASIC costs are not transparent to regulated industry participants. It also exposes ASIC to an increased risk of funding cuts that are unrelated to changes in the cost of delivering on its mandate. The Senate Economics References Committee report on ASIC's performance highlighted that resource constraints affect ASIC's capacity to conduct surveillance across regulated entities.28

Most of the revenue collected by ASIC on behalf of Government comes from annual fees paid by small proprietary companies as part of ASIC's registry business. These entities pay more than the cost of supervision. By contrast, the fees collected from large corporations, auditors, liquidators and financial institutions amount to less than the cost of regulating them, although some of this shortfall is offset by the money Government collects through the Financial Institutions Supervisory Levies administered by APRA.

The Wallis Inquiry recommended that both APRA and ASIC should be industry funded.29 However, this recommendation was only adopted in relation to APRA. At that time, the revenue collected by ASIC on behalf of the Australian Government was required to be shared with the states.

Enforcement tools

Although ASIC's AFSL licensing powers were significantly strengthened in 2012, as part of the Future of Financial Advice law reforms, ASIC's submission notes that some gaps remain in its capacity to exclude persons who are not fit and proper from the industry:30

  • Ownership or control of licensees can change without the need to obtain approval from ASIC — or APRA, in the case of prudentially regulated entities. This problem was identified in relation to the collapse of Trio Capital. While the previous Government agreed to a recommendation by the Parliamentary Joint Committee on Corporations and Financial Services to address this issue, the law has not been changed.31

The extent to which ASIC can consider previous conduct in other businesses in determining whether an applicant will satisfy the 'fit and proper' test is uncertain. This can limit its capacity to refuse a licence to applicants who have played a material role in businesses previously subject to enforcement action. This issue was identified in the Senate Economics References Committee's report on ASIC's performance.32

  • ASIC is limited in its capacity to use the licensing regime to impose conditions on firms to address concerns about internal systems relating to serious or systemic misconduct. At present, these can often only be imposed through enforceable undertakings with the agreement of the licensee.

As the Inquiry noted in its Interim Report, the maximum penalties in Australia for contravening laws governing financial sector conduct are low by international standards. For example, ASIC cannot seek disgorgement of profits in relation to civil contraventions.33 As such, current penalties are unlikely to act as a credible deterrent against misconduct by large firms. While the Inquiry recommends substantially higher penalties, it does not believe that Australia should introduce the extremely high penalties for financial firms recently seen in some overseas jurisdictions. This practice risks creating inappropriate incentives for government and regulators unless revenue is separated and used for social or public purposes.

Conclusion

Few submissions comment on ASIC enforcement powers or the adequacy of the current penalty regime. Most discussion of ASIC enforcement powers focused on whether or not ASIC should regulate product manufacture and distribution, although there was some discussion of the balance between administrative remedies on the one hand, and enforceable undertakings and judicial remedies, such as civil and criminal penalties, on the other.34 Some submissions specifically support substantially increasing maximum penalties.35

Stronger enforcement of the current framework can reduce demands for new rules and regulations. This is a particularly important issue for ASIC given the breadth of its responsibilities. The main risk of the new arrangements is that they may impinge unfairly on the rights of industry participants. However, ASIC decisions in this area would continue to be subject to merits review.

Second round submissions are divided on the issue of whether Government should charge fees and levies that reflect the cost of ASIC's regulatory functions. Several submissions support industry funding, while others were opposed to this option.36 Remaining submissions that dealt with the issue support the concept of industry funding provided it is accompanied by stronger transparency and accountability mechanisms.37 Others emphasise that Government, rather than regulators, should determine the overall quantum of funding.38 One issue is whether ASIC's regulatory functions are 'public goods' that should be funded through general taxation. Although ASIC's regulatory functions reflect public policy objectives, the Inquiry does not believe this should prevent the introduction of industry funding. However, it may be inappropriate for particular functions, such as financial literacy. Industry funding is already used by APRA as well as many similar regulators overseas.39

The main benefit of industry funding is its potential to give ASIC more predictable funding as well as strengthen engagement between ASIC and industry on the costs of conduct and market regulation. It would also have some potential costs. Depending on how they are designed, fees and levies have the potential to increase barriers to entry and potentially limit competition. One submission raises this concern in relation to existing cost recovery arrangements for market supervision.40

To maximise its benefit, the funding model should be structured to create a close relationship between the incidence of fees and levies and the cost of regulating the relevant activity. Costs must also be attributed fairly across different firms and industry segments. The way in which industry funding is implemented may need to be tailored to different industry sectors.

The Inquiry expects the benefits of industry funding to exceed the costs, subject to careful implementation and inclusion of an appropriate transparency and accountability framework.41 It has sought to address stakeholder concerns about industry funding by ensuring Government would continue to set ASIC's budget. Recommended three-yearly reviews would bring additional rigour to the budget process, and improve the efficiency of the regulators.


28 Senate Economics References Committee 2014, Report on the Performance of the Australian Securities and Investments Commission, Commonwealth of Australia, Canberra, pages 23–24.

29 Commonwealth of Australia 1997, Financial System Inquiry Final Report, Recommendation 107, Canberra, page 535.

30 Australian Securities and Investments Commission 2014, Second round submission to the Financial System Inquiry, page 46. This issue is also covered in Chapter 4: Consumer outcomes.

31 Parliamentary Joint Committee on Corporations and Financial Services 2012, Inquiry into the Collapse of Trio Capital, Commonwealth of Australia, Canberra, pages 127–128; Commonwealth of Australia 2013, Government Response to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Collapse of Trio Capital, Canberra, page 2.

32 Senate Economics References Committee 2014, Report on the Performance of the Australian Securities and Investments Commission, Commonwealth of Australia, Canberra, pages 387–388.

33 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, pages 3-124 to 3-125.

34 Minter Ellison 2014, Second round submission to the Financial System Inquiry, page 9.

35 Law Council of Australia 2014, Second round submission to the Financial System Inquiry, Business Law Section, pages 7–8 and 10–12; Australian Shareholders' Association 2014, Second round submission to the Financial System Inquiry, page 1.

36 Choice 2014, Second round submission to the Financial System Inquiry, page 25; EY 2014, Second round submission to the Financial System Inquiry, page 16; Stockbrokers Association of Australia 2014, Second round submission to the Financial System Inquiry, pages 13–15; SMSF Professionals Association of Australia 2014, Second round submission to the Financial System Inquiry, page 73.

37 For example, Australian Financial Markets Association 2014, Second round submission to the Financial System Inquiry, page 46; Insurance Council of Australia 2014, Second round submission to the Financial System Inquiry, page 15; Westpac Group 2014, Second round submission to the Financial System Inquiry, page 109.

38 Herbert Smith Freehills 2014, Second round submission to the Financial System Inquiry, ASIC Funding, supplementary submission; National Insurance Brokers Association 2014, Second round submission to the Financial System Inquiry, page 27.

39 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, page 3-112.

40 Chi-X Australia 2014, Second round submission to the Financial System Inquiry, pages 2-6.

41 Basic requirements are set out in Department of Finance 2014, Australian Government Cost Recovery Guidelines, Resource Management Guide No. 304, Commonwealth of Australia, Canberra.