ASIC's recently published Strategic Outlook outlines its priorities for responding to the key risks it believes will affect investors, and gives some interesting clues into what industry participants can expect from ASIC over the next 12 months, such as more surveillance of insider trading, breaches of continuous disclosure obligations and governance practices. It also provides a warning to the six largest financial institutions that it will be targeting them by focusing on their compliance with high-risk areas of the law. Partners Marc Kemp and Michelle Levy and Overseas Practitioner James Kanabar report.
On 20 October 2014, the Australian Securities & Investments Commission (ASIC) published its Strategic Outlook for the 2014-2015 financial year. The Outlook sets out the trends shaping ASIC's regulatory focus, provides examples of its intended responses to key risks and outlines the outcomes ASIC is seeking to achieve in its regulation of financial services and markets in Australia.
The Outlook is a new initiative, which forms part of ASIC's focus on improving its transparency. Next year, ASIC will also publish a more detailed risk outlook, alongside its strategic plan. The Outlook touches on a number of recurring themes, which have previously been raised by ASIC and on which we have previously reported. By re-visiting themes – as it did again in its submission to the Senate inquiry on forestry schemes last week (see our Client Update: Broader reform themes evident in ASIC's forestry schemes submission) – ASIC is pushing its agenda and building momentum in favour of its own position on certain issues, presumably in the hope of a favourable hearing for its position from the Financial System Inquiry (FSI).
This update provides a summary of what can be gleaned from the Outlook about ASIC's strategic priorities for the current financial year.
ASIC says that its key challenges for ASIC in 2014-2015 will be:
- balancing the competing interests of a free market-based system, and consumer protection;
- dealing with digital disruption in Australian financial services and markets;
- managing structural change in the Australian financial system through growth of market-based financing, largely driven by growth in superannuation;
- dealing with risks associated with greater complexity in financial products, markets and technology; and
- dealing with the effects of globalisation on Australian financial markets.
These challenges look very similar to those identified by the FSI in its interim report. ASIC proposes to respond to these challenges by deploying its strategic objectives: promoting trust and confidence and ensuring fair, orderly and transparent markets. This is based on ASIC's view that markets cannot do what they are meant to do – funding the real economy – in the absence of trust and confidence in them.
ASIC emphasises that all participants in the industry (including the ubiquitous but undefined 'gatekeepers') are responsible for ensuring investors have trust and confidence in the financial system. This makes conduct rules vital and so ASIC will continue to focus its surveillance on insider trading, market manipulation, continuous disclosure breaches and poor governance practices and systems. And there will be no respite for the providers of financial advice.
ASIC considers that Australian financial services licensees are gatekeepers responsible for ensuring that financial advice is of a high quality. But, ASIC again queries whether some licensees have the ability and willingness to do so. ASIC blames the culture of some financial services businesses and vertical integration.
ASIC urges financial services businesses to put processes and procedures in place which ensure that the welfare of their customers is at the heart of their business. It says that a culture that values compliance is central to building trust and confidence, market integrity and growth.
In response to its concerns, ASIC will target the six largest financial institutions to test how they comply with high-risk areas of the law relating to advice and dealing activities, and will also target responsible entities operating managed investment schemes.
ASIC's focus on gatekeepers and the role they play in ensuring the general health of the financial markets and consumer trust and confidence is in line with its belief in the importance of holding gatekeepers to account (See Unravelled: Will ASIC shift its regulatory focus from disclosure to suitability?).
Financial markets: ASIC identifies digital currencies and crowd funding as being areas of focus. It will continue to monitor technological innovations, educate investors (for example, by highlighting the benefits and risks associated with comparison websites), set compliance standards and provide guidance and, where appropriate (in this context, ASIC identifies misleading statements on the retail foreign exchange market), take enforcement action.
Retail products: ASIC continues to beat the drum on the dangers of poor retail product design and marketing. Complex product design increases the likelihood that retail investors will make investment decisions without understanding the risks and, although timely and frank disclosure of relevant information is important, ASIC once again emphasises its limitations. In line with its submissions to the FSI (see Unravelled: Disclosure: current complexity, future clarity?), ASIC notes that comprehensive disclosure is not useful if investors do not read or understand it, and if investors are motivated to acquire a product by non-rational, behavioural biases. We expect more on this in the FSI's final report, expected later this year.
Again consistent with a theme in the FSI's interim report, ASIC identifies a risk to Australian investors from emerging market issuers and the possibility that the direct listing of over the counter (OTC) derivative products by overseas licensees could lower standards. One of the ways in which ASIC intends to respond is by reviewing a significant proportion of key transaction documents, such as prospectuses, and prioritising those from emerging market issuers.
ASIC describes itself as a law enforcement agency, which uses around 70 per cent of its regulatory resources on surveillance and enforcement. ASIC places emphasis on its role in 'disrupting harmful behaviour' and 'taking tough, timely enforcement action' as part of its 'detect, understand and respond' approach.
ASIC devotes the final page of the Outlook to the 'mismatched expectations about the outcomes' it can achieve 'within the regulatory setting established by Parliament'. ASIC notes that there can be an expectations gap where its role or powers to address wrongdoing are limited, such as when an appropriate remedy is not available to it. ASIC also notes that there are risks which it 'cannot address within current regulatory settings'.
Happily, ASIC does not, this time, refer to the need for a 'more flexible regulatory toolkit'. Nonetheless, its emphasis on enforcement and specific reference to the limitations placed on its power by law can be viewed in the context of ASIC's previously-stated desire to acquire (i) product intervention powers (see Unravelled: Some facts (and myths) about ASIC and product intervention powers) and (ii) a broader range of more onerous deterrents to wrongdoing, based on its view that the current range of deterrents does not compare favourably to those that are available to other regulators (see Unravelled: Increasing ASIC's enforcement powers). The fact ASIC raises the 'expectations gap' on the final page and states its intention to respond with increased reporting suggests this may also be in part a response to the criticism ASIC has faced during the past year. Once again, we expect that the FSI's final report will have something to say about this.