Unravelled, by Michelle Levy
In all the excitement of the release of the Government's Implementation Roadmap (for the Royal Commission recommendations) and ASIC's Enforcement Update, you may have missed a rather interesting speech by Commissioner John Price at the Risk Australia Conference. The topic was 'Threats and Harms'. You might ask whether they invited the wrong regulator. And that would be a good question because there was a lot Commissioner Price spoke about that overlaps with the sorts of things APRA's Chair and members are worrying about. But the language is slightly different – and the response is quite different.
Where APRA talks about risk, ASIC talks about harm – and Commissioner Price says that ASIC has identified five drivers of harm: namely, poor design and inappropriate sale of products; inappropriate sale of credit products to consumers; poor conduct in financial markets; poor governance; and misuse of data.
There is quite a long list of 'harms' in the first bucket, with the chief culprits being over-the-counter derivatives sold to retail clients. There is no doubt that an 'OTC derivative … linked to crypto-assets' sounds dangerous, but it is notable that ASIC issued the AFSLs authorising the sale of these products to retail clients.
And there are the usual suspects here too. ASIC continues to be worried about consumer credit insurance, especially when it is insuring a credit card debt and conflicted business models, leading to consumers being offered products that are aligned to the interests of the group, despite there being 'better performing products in the market', with a special mention here of managed discretionary accounts. Recommendations to establish SMSFs and excessive product and advice-related fees in superannuation are also proving to be somewhat intransigent problems.
In the next bucket, ASIC is worried about the harm to consumers of increasing levels of household debt, and notes, somewhat ambiguously, that 'responsible lending is an established legal obligation'. ASIC has held public hearings on the topic over the last week or so in Melbourne and Sydney, and it might be that this will be an area where we see some pressure for legislative change. While it is true that the Royal Commission did not recommend any changes to the unsuitability requirement in the National Consumer Credit Protection Act, responsible lending goes beyond that test, and Commissioner Hayne did say in his report: 'If the court processes were to reveal some deficiency in the law's requirements to make reasonable inquiries about, and verify, the consumer's financial situation, amending legislation to fill in that gap should be enabled as soon as reasonably practicable.' It was in bold, if you missed it. I think it is fair to say that at least ASIC might think the court processes have revealed some deficiency in the law.
ASIC is also very concerned about poor governance in the industry, and here the special mention goes to poor board oversight and inappropriate remuneration structures. I told you it sounded like a speech by an APRA member. The Commissioner said the combination 'provide[s] a recipe for continued systemic misconduct which can lead to consumer losses', among other things. He said that ASIC is 'committed to taking action where directors and officers act in their own best interests, not those of the company, or otherwise fail in their duties'. In short, the proceedings ASIC promises to bring before Christmas will include actions against directors for breach of directors' duties.
And this brings me to what ASIC is doing to address the threats and harms it has identified. Well, here there are seven things starting (and perhaps ending) with enforcement. Here Commissioner Price says ASIC's focus is on enforcement action with 'a high deterrence value and those involving egregious conduct, especially those impacting vulnerable consumers' (as to which, see above). ASIC is also (like the Government) continuing to address the Royal Commission's recommendations and referrals, establishing itself as a conduct regulator for superannuation, addressing harms in insurance, improving governance and accountability, protecting vulnerable consumers and addressing poor financial advice outcomes. All of which gives us a pretty good pointer on what will be in ASIC's next corporate plan, which will be released at the end of August.
Until next month, and, in the meantime, good luck.