Execution of mandate

A range of factors impact a regulator’s ability to execute its mandate, in particular:

  • The scope and clarity of the regulator’s mandate and powers
  • Ability to attract and retain experienced and talented staff
  • Sufficient, stable and clear funding, discussed in the Independence and accountability section

Preliminary assessment

Regulator mandates

Observation

Regulators’ mandates and powers are generally well defined and clear; however, more could be done to emphasise competition matters. In addition, ASIC has a broad mandate, and the civil and administrative penalties available to it are comparatively low in relation to comparable peers internationally.

The competition mandates of Australian financial sector regulators compare favourably to international peers. For example:

  • APRA’s mandate, like that of Canada’s prudential regulator, includes an explicit reference to competition. New Zealand refers to competition less directly through efficiency, while the United Kingdom prudential mandate appears solely stability focused.
  • ASIC’s mandate is similar to peers, with the exception of the United Kingdom Financial Conduct Authority (FCA), which has a specific objective to promote competition.

However, more could be done to strengthen competition considerations through mechanisms other than amending the regulators’ mandates.

As a conduct regulator in an advanced, complex economy, ASIC’s mandate is broad. The Inquiry seeks views on the breadth of ASIC’s mandate and whether this causes or exacerbates challenges for ASIC.

Additionally, gaps in ASIC’s powers may reduce its ability to enforce market conduct regulation.

Balancing objectives: competition

The Inquiry recognises that, although the individual parts of Australia’s regulatory mandates are clear, they are not entirely unambiguous. Regulators are required to make judgements in balancing sometimes competing objectives. Submissions typically raise this issue in the context of competition.

Some submissions suggest that, in balancing objectives, APRA tends to prioritise stability above competition. APRA has stated that “the GFC has dispelled any simplistic notion that there is a ‘trade-off’ between financial stability and sustainable competition”.38 Some stakeholders consider that APRA’s mandate should be adjusted to give more weight to competition and competitive neutrality. However, others reject the idea that there is too much focus on stability. For example, APRA’s policy-making process demonstrates its routine consideration of competition issues. Additionally, APRA’s discussion papers and responses to submissions contain references to competition where a proposal may have an effect on competition or where the industry has raised competition concerns in submissions.

Submissions, including from ASIC itself, also argue that ASIC should be given a mandate to promote competition. However, like APRA, ASIC’s mandate with respect to competition is broadly similar to international peers, with the exception of the United Kingdom FCA, which has been given a mandate to promote competition, rather than take account of efficiency.

Breadth of mandate: ASIC

ASIC’s mandate broadly covers two areas:

  1. Financial markets, financial services and corporate regulation
  2. Business and company registration

ASIC’s powers and responsibilities in the first area are broadly consistent with financial conduct regulators in other jurisdictions, although most do not have the extent of ASIC’s coverage. Some regulators are moving closer to the ASIC model; for example, the United Kingdom FCA is now taking over responsibility for consumer credit.

ASIC’s responsibilities in the second area are unique compared to conduct regulators overseas.

ASIC’s mandate has grown considerably over the last two decades, generally in response to major reform processes and reviews (see Figure 7.3). In the first instance, the Wallis Inquiry saw significant benefits in having investor and consumer protection within the one agency, especially given the growing inter-linkages between different financial products and services. Subsequent expansions have also been the outcome of policy reforms designed to ensure greater consistency in regulation for both consumers and businesses; for example, the move of consumer credit from a fragmented, state-based regulatory system to a single national regulator.

The responsibilities in ASIC’s registry business have also expanded; for example, through the recent takeover of business name registration from the states and territories.

Thus, ASIC now manages a diverse range of tasks and therefore requires a cultural and skills mix that allows it to perform supervision, business guidance, consumer education, law enforcement and corporate registry. One issue is whether these increased responsibilities have been sufficiently matched by increased resources.

Figure 7.3: Breadth of ASIC mandate

This figure shows how the ASIC mandate has grown over time. The original mandate for ASIC and its precursor agency, the ASC, included: the managed investment scheme regime; Market supervision; insolvency regime and liquidator oversight; auditor oversight; corporate regulation; and the corporate registry function.In 1998, Australian consumer law for financial services was added. In 2002, Financial Conduct and Disclosure including for securities, banking, insurance and superannuation, was added. Finally, in 2010 the national Consumer credit regime was added.

The Inquiry notes the Senate inquiry into the performance of the ASIC which is currently underway. Relevant findings will be considered by the Inquiry in the lead-up to the Inquiry’s final report.

Given the breadth of ASIC’s mandate, it can be argued that ASIC has too many regulatory functions, with staff spread between too many responsibilities. It is possible that narrowing ASIC’s mandate may allow it to become a more tightly focused regulator and target higher-risk entities, although there are also benefits and efficiencies from bringing together similar functions.

Some stakeholders have raised the option to split consumer protection functions from conduct and market integrity functions.

Some stakeholders suggest generic consumer regulation contained in the ASIC Act could be moved to the ACCC. The main challenge with this option would be drawing a clear line between generic consumer protection provisions and specific provisions tailored to financial products and services.

Other stakeholders have suggested moving industry-specific consumer regulation, which includes relevant licensing regimes, either to a new, specialised consumer and conduct regulator or to the ACCC. This would leave ASIC responsible for corporate regulation, and markets and wholesale activity.

Both these options could potentially lead to duplication and issues of boundary definition, and would mean that the agency acquiring the new responsibilities would need to develop (or acquire from ASIC) the relevant financial services expertise.

Other options include:

  • Splitting market supervisory activities (i.e. FMI and participants licensing and oversight) into a specialised market supervisor
  • Moving insolvency functions to the Australian Financial Security Authority (AFSA)
  • Moving the registry function out of ASIC

Regarding this last option, the Government has already announced a scoping study into options for future ownership of this function. Arguably, the registry function aligns least well with other core ASIC functions.

It may also be possible to increase the emphasis on oversight of self-regulating bodies. This would allow ASIC to lift its focus to higher-level breaches and leave lower-level investigations to industry bodies. ASIC itself has raised this possibility, but has noted that this depends on the capacity of these bodies to police their own members.

As for any proposed changes, significant evidence or arguments for change would be needed. The Inquiry generally opposes creating new regulatory bodies.

Enforcement powers: ASIC

Regulators require a sufficient set of powers to execute their mandate and foster credibility with the market. Given the size and diversity of the regulated population, ASIC cannot conduct the intensive supervision typically performed by a prudential regulator.

Enforcement sends a deterrent message to industry and is an important aspect of the consumer regulatory framework. Effective supervision and enforcement builds trust and confidence in the financial system. However, ASIC cannot pursue all complaints received. Its enforcement activity targets areas of strategic priority and incidents with evidence or likelihood of consumer detriment.

When applying the market conduct and disclosure framework, ASIC’s submission demonstrates that criminal penalties in Australia appear to be broadly consistent with overseas regimes, but civil and administrative penalties are comparatively low, as shown in Table 7.2 below.

ASIC’s mandate also has important gaps when compared to major domestic and international jurisdictions. For non-criminal proceedings, ASIC does not have the power of disgorgement available in Canada, Hong Kong, the United Kingdom and the United States. ASIC cannot impose fines on AFSL holders, although it can suspend or revoke their licence. Penalties available to the ACCC are higher than those available to ASIC.

Table 7.2: Comparison of Australian and overseas jurisdictions’ civil and administrative penalties for individuals (AUD)
Insider trading Market manipulation Disclosure False statements Unlicensed conduct Inappropriate advice
Australia Civil: $200,000 Civil: $200,000 Civil: $200,000 Civil: $200,000
Canada Admin: $1.05 million Admin: $1.05 million Admin: $1.05 million Admin: $1.05 million Admin: $1.05 million Admin: $1.05 million
Hong Kong Admin: unlimited Admin: $1.12 million Admin: $1.4 million, or 3 times the benefit gained
United Kingdom Civil and admin: unlimited Civil and admin: unlimited Civil and admin: unlimited Civil and admin: unlimited Admin: unlimited
United States Civil: three times the benefit gained Civil: greater of $111,000 or the benefit gained Civil: greater of $111,000 or the benefit gained Civil: greater of $111,000 or the benefit gained Civil: greater of $111,000 or the benefit gained Admin: $83,850

Source: ASIC.39

Talent management

Observation

To be able to perform their roles effectively in accordance with their legislative mandate, regulators need to be able to attract and retain suitably skilled and experienced staff.

Regulators face challenges in recruiting and retaining staff, given regulatory staff remuneration falls short of salaries in the industry they regulate, and against whom they compete for personnel. Another hurdle is the perception that APRA and ASIC’s operational independence and effectiveness is unduly hampered by public sector operating constraints. For example:

  • The public service enterprise bargaining process, and the constraints it imposes on APRA and ASIC’s abilities to negotiate an appropriate enterprise agreement with their staff, have created uncertainty for APRA and ASIC staff with respect to future remuneration and advancement opportunities. The constraints on APRA and ASIC’s abilities to set terms and conditions for staff may detract from the regulators’ ability to attract and retain qualified staff.
  • ASIC has advised that the inflexibilities involved in Australian public service employment under the Public Service Act 1999 can make it difficult for ASIC to shape the workforce and culture that it requires to meet the organisation’s priorities. Examples of inflexibilities relate to:
    • Classification and remuneration of staff
    • Length of employment of temporary staff
    • Management decisions affecting staff
    • The terms and conditions of any enterprise agreement

Unlike ASIC, neither APRA nor the RBA are subject to the Public Service Act 1999.

Policy options for consultation

Strengthening of competition considerations through mechanisms other than amending the regulators’ mandates

The Inquiry seeks views on the following options to emphasise competition matters beyond amending mandates:

  • Requiring the RBA to report every three years on the efficiency and competitiveness of the Australian financial system.
  • Appointing an additional APRA member or establishing another mechanism for considering the impacts of regulatory intervention on competition. APRA’s view is that appointing an additional member would be counter to best-practice governance principles, under which all members are responsible for decisions.
  • Requiring APRA’s annual report to include a section on competition.

Introducing stronger accountability mechanisms for the regulators could assist in ensuring all existing objectives are given due consideration.

Refine the scope and breadth of ASIC’s mandate

Options for narrowing ASIC’s mandate could include moving consumer protection functions to the ACCC or a new financial consumer protection agency, creating a new financial services and conduct regulator, creating a new specialised market supervisor, moving insolvency functions to AFSA and removing the registry function.

Review the penalty regime in the Corporations Act

A stronger penalty regime could strengthen the impact of ASIC’s enforcement action and provide a more effective deterrent message against misconduct. A review of penalties under ASIC-administered legislation could explore:

  • The adequacy of maximum criminal penalties
  • The availability and level of civil penalties, including the potential of using multiples of benefit obtained and converting the current maximums into penalty units
  • The availability of administrative penalties
  • Introducing disgorgement in non-criminal proceedings to remove any financial benefit, including profits or avoided losses, obtained illegally
  • Whether the infringement notice regime should be expanded to cover more contraventions

Review mechanisms to attract and retain staff, including terms and conditions

The incentives and remuneration necessary to attract the highest quality pool from which to select and retain regulator staff could be broadened. A range of policy options follow to achieve this outcome.

APRA and ASIC should have flexibility regarding the terms and conditions under which they employ staff and determine remuneration. One option for providing this flexibility would be to exempt APRA and ASIC from the public sector bargaining framework and, to the extent it applies, the Public Service Act.40 APRA and ASIC could strengthen transparency and accountability in this area by providing appropriate additional information on remuneration levels and other staffing metrics (such as projected staff levels) in annual reports.

The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

  • No change to current arrangements.
  • Strengthen competition considerations through mechanisms other than amending regulators’ mandates.
  • Refine the scope and breadth of ASIC’s mandate.
  • Review the penalty regime in the Corporations Act.
  • Review mechanisms to attract and retain staff, including terms and conditions.

The Inquiry seeks further information on the following areas:

  • Are changes needed to strengthen and/or refocus ASIC?
  • Is the current enforcement regime adequate? Does ASIC have adequate powers?
  • Are there alternative mechanisms for promoting better consideration of competition within financial sector regulation?

38 Australian Prudential Regulatory Authority 2014, First round submission to the Financial System Inquiry, page 26.

39 Australian Securities and Investments Commission (ASIC) 2014, First round submission to the Financial System Inquiry, page 48.

40 Note the starting positions of the two regulators are different: APRA is subject to the public sector bargaining framework, but is exempt from the Public Service Act employment conditions.