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Unravelled: Proposed industry funding model for ASIC

6 October 2015

Written by Partner Alex Cuthbertson

Treasury has released a Consultation Paper seeking comments on a proposed industry funding model for ASIC.1 Under the proposed model, the costs of ASIC's regulatory activities will be recovered directly from the companies and other entities that are regulated by ASIC – at a direct cost to industry of approximately $260 million.2 This amount will be collected through a combination of annual supervisory levies (around $196 million) and significant fee increases for fee-for-services activities to reflect ASIC's actual costs of providing specific on-demand services to individual entities.

Submissions on the proposed model must be lodged by Friday, 9 October 2015. Not surprisingly, the consultation paper doesn’t expressly seek comment on whether ASIC should move to an industry funded model. It seems clear that the Government is already committed to this outcome, having designed phase-in arrangements which will see it recover 50 per cent of its costs attributable to the financial services industry in 2016-2017 and full cost recovery of ASIC's costs across all sectors by 2018-2019. However, Treasury states in the Consultation Paper that no final decision will be made on the introduction of the new funding model until the consultation period and the ASIC Capability Review, which was announced on 24 July and is expected to report by the end of the year, have concluded.

Who will pay?

The Consultation Paper divides ASIC's regulated population into six industry sectors: Companies, Australian Credit Licensees, AFS Licensees, Registered Liquidators, Auditors and Market Infrastructure Providers. Most of these sectors are then broken down into sub-sectors. ASIC's annual budget will be apportioned across the sectors based on the number of entities in each sector and an assessment of the risks and regulatory activities required for each sector.

How much will you pay?

The overriding purpose of the proposed model is to ensure that the costs of ASIC's regulatory activities are borne by those who create the need for regulation, and that those costs are borne in proportion to the amount of supervision required by each industry participant.

The amount to be paid by each entity will, therefore, depend upon the nature of the entity and the services it provides – which will dictate which sector and sub-sectors it falls into.

Within each sub-sector it is proposed that there will be a number of different tiers which are intended to reflect the different risk profiles and, therefore, the intensity of ASIC's supervisory activities, in relation to different entities. These tiers will be based on proxies for ASIC's supervisory intensity to ensure the levy payable by entities matches the cost of their regulation.

Proxies for supervisory intensity

The proposed proxies for supervisory intensity in each of the sectors and sub-sectors are set out below.

Public companies (listed, disclosing) Market capitalisation
Australian Credit Licensees Credit volume

AFS Licensees

  • REs/Superannuation Trustees
  • Market participants
     
  • Deposit product providers
  • Financial advice providers
  • Investment banks

Number of authorisations

Funds under management

Cash equity/futures markets: transaction/message counts through market surveillance system

Value of deposit liabilities

Tier 1 products: number of registered financial advisers

Revenue

Registered Liquidators 'Assets realised' or number of administration appointments
Auditors Publicly listed entities: share of annual audit fee revenue earned
Market Infrastructure Providers Numbers of licences held

One of the arguments for the proposed model is that it will establish price signals which will drive economic efficiencies in the amount of resources ASIC needs and the way in which these resources are allocated to different sectors. It is suggested that industry will self-regulate to achieve the Government's objectives, which will reduce the resources ASIC needs and lower the costs allocated to each sector.3

It is debateable, however, whether all of the proposed proxies will in fact achieve this aim.

For example, the proposed proxy for supervisory intensity of publicly listed, disclosing companies is market capitalisation. The Consultation Paper justifies this proxy on the basis that the intensity of ASIC's regulation varies depending on the scale of a company's operations. This may well be the case. But the intensity of regulation also depends upon the strength of a company's internal compliance program and the level of resources it invests in ensuring compliance. Notwithstanding that large, publicly listed companies tend to have more developed and sophisticated compliance programs, they will pay a larger annual levy (up to a maximum of $320,000 for companies with market capitalisation over $15 billion). It is, therefore, hard to see how this levy mechanism will drive behaviour within individual entities which might result in the economic efficiencies envisaged.

Similarly, the tiering methodology for AFS Licensees will see REs and Superannuation Trustees paying an annual levy based on the amount of funds under management. An RE with more than $10 billion funds under management will pay an annual levy of $206,000.

These proposed proxies will provide no incentive for individual regulated entities to invest in compliance and are instead likely to see larger entities carrying a disproportionate burden of ASIC's costs.

Entities that provide multiple regulated services

Importantly, where an entity provides multiple regulated services (and, therefore, falls into more than one industry sector or sub-sector) that entity will pay the annual levy that applies to each category of services it provides.

This is best illustrated by the following example which is provided in the Consultation Paper:4

Company F is a large proprietary company that holds an AFS licence with two licence authorisations and is a market participant and a Retail OTC Derivative issuer. It is required to hold NTA of $2.6 million to support the issue of retail OTC derivatives. As a market participant, they were responsible for 200,000 message counts in 2014-15 (1 per cent of the total $13 million).

Company F's annual levy will equal:

The levy for large proprietary companies: $350
A levy for holding an AFS licence and two authorisations (3 x $250) $750
Levy for being an authorised Retail OTC Derivatives Issuer (Tier 1) $95,000
Fixed levy for being an authorised Market Participant: $15,500
Variable levy for being an authorised Market Participant: $130,000
(0.01 x $13million)
Total levy payable by Company F: $241,600

There is no discount for entities that operate across a range of sectors or sub-sectors. This outcome is justified on the basis that, because ASIC's supervisory teams focus on specific activities, rather than an entity in its entirety, there are no efficiencies in scope for ASIC in regulating more complex entities. Perhaps, if the Government is looking for economic efficiencies, this is something that might warrant further consideration.

Significant fee-for-service increases

ASIC currently charges industry fees for a range of fee-for-service activities, that is, activities undertaken at the request of a specific entity such as licensing, the granting of authorisations and applications for relief. However, the current fees do not accurately reflect ASIC's costs of undertaking these activities.

Under the proposed industry funding model, these fees will be set at a level that reflects ASIC's actual costs. The new fees are set out in Attachment G to the Consultation Paper.

In some cases this will result in some very significant increase. For example:

Current fee Proposed fee
Australian Financial Services Licence application (body corporate) $1,522 $11,000
Change of control for AFS licence $0 $4,400
Request to revoke an Australian financial services licence $37 $2,200
Application to approve trustee for debenture holders $72 $16,000

It is proposed that the new fees will become effective from 1 July 2016 and will be reviewed every three years.

Conclusion

An industry funding model will bring ASIC into line with other regulators, including APRA and AUSTRAC who are funded (at least in part) by the entities they regulate. However, the experience of those other industry funded regimes demonstrates the difficulty of devising a funding mechanism that results in costs being allocated proportionately to the level of supervision required. No doubt the submissions received by the Government will point out the flaws in the proposed model. Although we query whether a better system can be devised which does not significantly increase administration and therefore compliance costs.

Footnotes
  1. Proposed Industry Funding Model for the Australian Securities and Investments Commission, Consultation Paper, 28 August 2015.
  2. Based on Government funding to ASIC in 2014-15 (including funding for capital expenditure) to undertake its regulatory activities: Consultation Paper, page 5.
  3. Australian Securities & Investments Commission, 'User-pays funding model for ASIC', May 2014.
  4. Consultation Paper, page 47.

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