ASIC under fire: Can a change of the guard fix regulator’s image?

The Australian 12:00am September 22, 2018

Ben Butler

Hard and fast. That’s how one of the Australian Securities & Investments Commission’s new commissioners took on the spivs, crooks and scumbags infesting New Zealand’s corporate landscape when he became the head of the Kiwi regulator back in 2010.

At the time, New Zealand was reeling from the collapse of a series of finance companies that erased about $NZ3 billion in savings from 200,000 depositors.

“We wanted to create a deliberate image that we were going to be hard-nosed about regulation in terms of misconduct,” Sean Hughes told a parliamentary inquiry in 2014.

“There had been some very vehement criticism of our predecessor bodies that they had been too soft on breaches of the law.”

On his first day at the new Financial Markets Authority, Hughes inherited 55 investigations from its predecessor, the largely useless Securities Commission of New Zealand. By the time he finished up, four years later, 32 company directors had been convicted of crimes — a large number in a small pond like New Zealand.

When Hughes, who is currently chief legal counsel at gambling giant Tabcorp, steps into ASIC’s offices in early December, he’ll be in a very similar situation.

But can he, and a clutch of other new faces crowding the ASIC boardroom, fix the regulator’s battered public image?

Joining new chairman James Shipton, who started in February, is a new deputy chairman for enforcement, Daniel Crennan, QC, who joined on July 16.

And just last Monday was the first day on the job for Danielle Press, a banker and superannuation executive who reviewed the payday lending sector for the government (reforms are currently stalled due to backbench opposition within the Liberal Party).

At the same time, ASIC is soon to lose one of its most experienced operators, seven-year veteran Peter Kell, who has been the spearhead of its flagship investigations into some of the industry’s dirtiest corners including financial planning and insurance.

He finishes up on December 6 — about five months before his term expires in May.

Over the past few years, Kell has also frequently been the public face as ASIC was hammered again and again — in the media, in parliament and most recently at the banking royal commission — as an ineffective regulator that does not do enough to deal with bad behaviour in the finance sector.

“The breadth of misconduct right across the financial services sector in some of the largest of institutions has been a profound challenge,” Kell tells The Weekend Australian.

“There has been a very significant amount of work undertaken but that still needs to happen to get the financial services industry up to the standard the community expects.

“At the heart of most of the problems I think have been conflicts of interest, and we are seeing that play out in the royal commission.”

These include remuneration and the dizzying array of commissions paid across the industry to everyone from financial advisers to insurance salespeople.

But Kell also points the finger at deeper structural conflicts, visible where companies both manufacture and sell financial products.

“There have been conflicts of interest in the way products have been designed too,” he says.

“Products that have been designed to be attractive to sell rather than meeting the needs of consumers.”

Some conflicts have been removed “but there’s obviously still considerable work to be done in areas such as grandfathering,” he says. “There are also questions about some of the structural conflicts that have been raised in the royal commission … whether they might be better managed or whether they should be removed altogether.”

Kell thinks he leaves ASIC in good shape. “I think James Shipton is a terrific chair,” he says. “I’m enjoying working with him and I’ll be working with him for a few months.

“I’m very pleased to be leaving ASIC with a full bench of commissioners.”

He’s also happy to see the government heed ASIC’s calls for more muscle, with powers to intervene in products and impose obligations on industry to design and distribute appropriate products before parliament. “We are very pleased the government has agreed to the broad set of enforcement reforms,” he says.

Meanwhile, the public hits keep coming. At the royal commission, ASIC and sister regulator the Australian Prudential Regulation Authority have been criticised for failing to take legal action quickly enough or at all, a criticism also taken up in recent week by the powerful lower house Standing Committee on Economics.

“ASIC needs to be tougher,” the committee’s chairman, Victorian Liberal Sarah Henderson said in a report tabled a fortnight ago.

“Australians expect the big banks and others to fear their regulator, she said. “There have been too many examples where ASIC has not adequately penalised those it regulates.

“The heavy reliance on enforceable undertakings, for example, rather than seeking court-imposed penalties, has not met community expectations.”

And new Treasurer Josh Frydenberg has been very keen to talk up the potential of new chairman Shipton while at the same time blaming predecessor Greg Medcraft for the regulator’s perceived failings. “There is a case to answer now for ASIC, not the current chairman who is new, but the question has to asked: If ASIC knew about this activity, this unlawful conduct, why didn’t they take action and why has this culture been allowed to permeate?” Frydenberg asked blitz last week.

Those close to the regulator think the new-found enthusiasm for corporate law and order is a bit rich coming from Canberra types who have in the past starved ASIC of funds (a situation that may now be fixed through a new funding model where industry pays a levy to be regulated).

And in the past the government has been unhappy to hear hard news from the regulator — back in October 2014, when Medcraft told a lunch table full of business journalists that Australia was a “paradise” for white-collar crime, the then finance minister, Mathias Cormann, rewarded him with an angry phone call.

Medcraft, who at the time was lobbying for harsher penalties, had to “correct” his statement.

“Basically the point is that we want to make sure we don’t become a paradise,” Medcraft told parliament a few days later.

It is no secret that Medcraft was extremely unpopular with Liberal Party insiders, who resented his calls for more powers and penalties and regarded him as a stooge of the Labor Party, which appointed the former Societe Generale banker a commissioner back in May 2011.

Kell was also unpopular with the Liberal faithful for reasons that aren’t entirely clear but appear to be related to his work in the financial services trenches.

The pair’s unpopularity within government ranks was reflected in the meanness of their most recent reappointments.

In May 2016, Medcraft got an extension of just 18 months — a move that left the government scrambling to find a replacement when the candidacy of anointed successor John O’Sullivan collapsed in October.

Kell went all the way to the end of his term in May before the government belatedly realised they needed him around to deal with the royal commission and a plethora of ongoing investigations.

And in December 2015, then-financial services minister Kelly O’Dwyer also reappointed another commissioner deeply involved in financial services, Greg Tanzer, for just 11 months. He was not replaced when his term expired.

Within ASIC, the government’s habit of treating the regulator as a whipping boy while at the same time promoting instability at the top through a chaotic appointments process is poorly regarded.

Insiders point out that appointments to other statutory bodies operating in the financial services space — APRA, the Reserve Bank and the Australian Competition & Consumer Commission — are nowhere near as topsy-turvy.

ASIC executives feel that if the government really does want a strong regulator, consistency at the top might be a start.

CBA whistleblower Jeff Morris, who blew up the bank’s financial planning scandal — a key factor in getting the royal commission bandwagon rolling — has a simpler solution: blow it up and start again.

He says that back in 2008, when he and his fellow CBA whistleblower “ferrets” were first considering dobbing the bank in to the regulator, one of them said to him: “The only problem with that, mate, is that ASIC is shite.”

ASIC’s willingness to strike an enforceable undertaking with the bank — a deal that had to be revisited once the scandal blew wide open — rankles Consumer Advocate Denise Brailey.

“What was so shocking was the lengths you had to go to get them to look like they were doing their job,” he says. “They never wanted to look at the forged documents [allegedly produced by planners].

“They wanted to strike a deal with CBA to get an enforceable undertaking.”

She says ASIC was too close to the top end of town, with staff moving back and forth between banks and the regulator.

“It was like a movie set with a facade of buildings, it was all fake.

“The problem was all the big players in the industry knew this and it suited them.

“The culture at ASIC is so broken, lazy and useless that it should be disbanded.”