In brief
Written by Partner Geoff Sanders and Lawyer Kelly Roberts
Wednesday, 20 April 2016 was a big day for ASIC. Along with the public release of the ASIC Capability Review Report (the Report), the Government announced a suite of reforms giving the regulator more funding and increased power. The Commonwealth committed to an additional $127 million over four years. The ultimate aim? – to better protect consumers and root out misconduct in the financial services sector.
At a high level, the key funding related points of the Government's announcement were:
- more funding for targeted initiatives such as data analytics, surveillance and strengthening ASIC's powers;
- exempting ASIC's employment practices from the Public Service Act 1999 (Cth) (the PSA); and
- a 'user pays' funding model.
We explore these issues in more detail below and seek to look beyond the headlines.
Targeted funding rather than general spending
ASIC's report card was not glowing. Although the Report stated that some of ASIC's regulatory capabilities were in line with global best practice, it concluded that other capabilities lagged well behind this standard. The purpose of the Government's funding injection is to make sure that ASIC is a 'tough cop on the beat' with the resources and powers it needs to nip misconduct in the bud.
So, what exactly is being funded and, importantly, will that funding provide the panacea to the ills identified in the Report?
Tellingly, the Government's package does not hand over the $127 million for general spending by ASIC. Rather, the funding has been earmarked for specific initiatives with:
- $61.1 million being invested to enhance ASIC's data analytics, surveillance capabilities and data management systems;
- $57 million being invested to enable increased surveillance and enforcement on an ongoing basis in the areas of financial advice, responsible lending, life insurance and breach reporting; and
- $9.2 million in funding to accelerate implementation of recommendations made by the Financial Services Inquiry including strengthening consumer protections in the ePayments Code; creating product distribution obligations for industry; creating a product intervention power; and a review of ASIC's enforcement regime.
This funding may go some way towards addressing the shortcomings identified by the Report, in particular those relating to IT systems, data management and enforcement effectiveness.
However, while additional funding in those key areas is to be welcomed, what is conspicuously missing from the announcement is any additional general funding to address some of more general skills gaps and other weaknesses which have been identified – indeed, once the user pays model is introduced in 2017, it seems the Government's funding to ASIC will be dramatically reduced.
Further, it is worth noting that the initiatives tagged for funding increases do not really answer the Report's central call for structural and cultural change within the regulator – that is, the Report calls for governance and leadership change, but the Government's response appears to be Band-Aid fix – simply a commitment to 'consider and review'.
Hope for a better, more sophisticated ASIC?
In line with the Report's recommendation, the Government also agreed to exempt ASIC's employment practices from the PSA. The logic here is that free from the restrictions of the PSA pay scale (the main form of employment for ASIC's staff), ASIC will be able to offer more competitive remuneration and effectively recruit and retain staff.
In particular, by exempting ASIC's employment practices from the PSA regime, the Government hopes that ASIC will have the ability to attract people with much needed specialist market expertise. The Report notes that the key challenge posed by the PSA is recruitment at the executive levels 1 and 2 (EL1 and EL2) and suggests that the lack of competitive salaries at those levels are a part of the problem in finding the right people with the right skills. The Report also notes that staff at peer agencies such as APRA and the RBA are not burdened by the restrictions of the PSA and receive higher salaries.
Generally speaking, the findings in the Report support this logic – in short, the view seems to be that the bulk of the ASIC workforce (below executive level) is made up of too many lawyers who have been at ASIC for too long and who haven't had sufficient experience in industry (outside of law firms). That is, what is missing are non-legally trained arrivals from the banks, fintech operators, fund managers, superannuation funds and other market participants that ASIC supervises. It is clear (not least from the experience of US regulators) that the ability to offer competitive, market-based salaries is an important (although not overriding) part of making a career at the regulator a realistic alternative for those people. Interestingly, the Report explains that the PSA does not pose the same challenges for recruitment of high-calibre senior executives, as the motivations of those attracted to these roles are different and remuneration packages are generally competitive with industry.
However, as noted above, without additional funding to ASIC for its general operations, it is a little difficult to see how merely lifting the PSA restrictions will result in significantly higher salaries being available to recruit the people the Report says are needed, at least in the short term – the money needs to come from somewhere.
User pay model may shift the burden
The Government also took the opportunity to announce that it would introduce an industry funding model for ASIC, commencing in the second half of 2017.
The user pays model was a recommendation of the Financial System Inquiry and its introduction does not come as a surprise given previous supportive statements from Government. Currently, ASIC is largely funded from consolidated revenue. Under the user pays system, all companies and sectors will be levied including banks, brokers, listed companies, super funds, insurers and financial planners. Those that use the regulator more, will pay more and a market price will be developed for the use of ASIC's resources.
A user pays funding model may mean that ASIC must work even harder to address the 'expectation gaps' relating to ASIC's perceived mandate and performance which were identified in the Report. Accountability and transparency will be key. ASIC will also need to become more effective in its use of reporting and accountability tools and communication strategies.
Given the Report's criticism of ASIC's internal governance structures, inward focus and lack of strategic direction, it will be interesting to see how ASIC manages the user pays system. The system may be overseen by an range of different committees within ASIC which might lead to weaker budgetary discipline. We hope a system can be devised which does not significantly increase administration and therefore compliance costs.
The design and implementation of the user pays funding model remains uncertain. The Government said that there would be further consultation. As with many things, it appears that the devil will be in the detail. For more insights on this topic, see our previous article: 'Unravelled: Proposed industry funding model for ASIC'.
What does this mean for the financial services industry?
So, what does this mean for the financial services industry?
- In the longer term, if ASIC is able to recruit from the market people with sector expertise, hopefully it will become a more effective regulator.
- A user pays system should incentivise businesses to invest in their risk and compliance programs and ensure that a good corporate culture is maintained.
- More funding to develop ASIC's 'reg-tech' capabilities, particularly in the market supervision area, will enhance ASIC's ability to analyse trade data for patterns and relationships. These tools will enable ASIC to intervene at an earlier stage in its investigations, continuing the trend we have seen in ASIC's enforcement approach to tackle misconduct at an early stage by nipping perceived poor culture in the bud.