Financial Services Regulation

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Unravelled: ASIC getting a bigger toolkit sooner than expected

4 May 2016

Written by Senior Associate Simun Soljo

In its response to the capability review into ASIC, the Federal Government has made a commitment to accelerate the implementation of a product intervention power for ASIC, and the product design and distribution obligations for the financial services industry. This is despite neither of these measures being discussed in the capability review panel's report. The review did however make some observations about ASIC's roles and powers, including some interesting comments about ASIC's role in licensing. In the current political environment, the Government will likely have no hesitation in expanding ASIC's 'toolkit', regardless of where the suggestions come from. We consider what this might mean for both the regulator and the regulated.

Capability review looks at ASIC's 'regulatory toolkit'

The capability review includes a section on ASIC's 'regulatory toolkit', which summarises the various means ASIC has to do its job. These range from unintrusive activities such as consumer education and providing regulatory guidance, to formal civil and criminal prosecution for breaches. The review panel's comments on ASIC's enforcement activities are discussed in another article in this edition of Unravelled. Here we want to pick up on two other aspects – ASIC's approach to consultation, and its role in licensing.

ASIC could do better on consultation

The review notes that ASIC produces a wide range of material to assist the regulated population in understanding laws and policies. While as lawyers we may sometimes be critical of some of the material produced, there is no doubt that many find it helpful as a guide to both the law and to ASIC's views on the law. The review panel also thinks that 'the quality of policy guidance is generally high', and in this respect ASIC is ahead of many other regulators. This is confirmed anecdotally by those who have had to engage, for example, with the guidance produced by UK regulators.

The review report points out, however, that ASIC's approach when consulting with stakeholders on policy and regulatory guidance can be inconsistent. It notes that in some cases the consultation is insufficient and 'results in policy guidance that can be impractical, require modification once implemented, or shows a lack of understanding of key issues', while in others the consultation 'demonstrated a sound process of issue identification, analysis, consultation and assessment'.

Curiously, however, the review panel makes no concrete suggestions about how ASIC should go about consulting on policy or regulatory guidance. The review report separately recommends that ASIC commissioners move towards a non-executive role which is more 'outward oriented' and which would involve them being more externally engaged. The panel expects that this would improve engagement with stakeholders. There is also a suggestion that ASIC make some changes to the way it uses external advisory panels. But it is difficult to see that either of these changes will make a great deal of difference.

One of the aspects of the typical ASIC consultation process that is puzzling and can be frustrating is the lack of clarity about the way the process is being undertaken within ASIC and the way it makes decisions in response to feedback. ASIC may provide sufficient time to allow feedback on a draft version of a regulatory guide, for example, but when the final version of the document is released, it will often be unclear why certain feedback has been accepted and other suggestions ignored. There is also often a lack of transparency about who has been consulted. There would be less frustration with ASIC's consultation process if it was clearer about the approach it would take and be more transparent about its reasons for accepting or rejecting the feedback it receives. Having to explain its reasons for accepting or rejecting feedback may also improve the quality of the guidance given.

Should licensing be harder to get?

The review panel notes ASIC's role in providing registration and licensing, but notes the 'strong and not unreasonable presumption on the part of consumers and investors, that the issuing of a licence is an endorsement of the worthiness of a licensee to hold that licence'. While the review report notes that ASIC needs to take care in the language it uses with consumers to correct public perceptions, it also appears to imply that ASIC's registration and licensing process should be bolstered so as to move closer towards the current expectations about what ASIC does. The report says that 'measures should be taken to increase the current "low" threshold for entry into the licensing and registration system, for example by increasing requirements relating to professional qualifications, standards and experience'.

Even with raised standards, it is always going to be a difficult job for ASIC to assess an applicant for registration or licensing, especially one that has no operating history. While increasing the threshold requirements may improve consumer outcomes by weeding out more applicants who are unlikely to be able to comply with their obligations, it will also increase the barriers to entry and reduce competition. It will, in particular, disadvantage small start-ups in the FinTech sector, many of which have good ideas but limited experience and institutional backing. The Government's in-principle support for a regulatory 'sand pit' for these types of entities heads in the opposite direction – towards lower entry standards. There is clearly a tension between reducing the hurdles to entry and ensuring consumers are adequately protected.

There is also an interesting suggestion that ASIC could collaborate with industry bodies who could be 'established as licensing agents under the supervision of ASIC'. We might refer to this as the 'franchised' model of regulation. While this is perhaps one recommendation that may be quietly set aside, it might one day be re-visited, especially if industry bodies prove themselves capable of effective self-regulation.

What about the FSI recommendations?

It is curious that the panel review makes no reference to the Financial System Inquiry's recommendations about giving ASIC additional powers. However, the Government is clearly keen to be seen to be taking action, and quickly. This makes sense in the context of the Federal Opposition Leader's call for a royal commission into misconduct in the banking and financial services industry, which the Government is resisting. So, in announcing its response to the capability review, it said that it is 'determined to ensure that ASIC has the powers it needs to protect the Australian public as soon as possible', and has allocated additional funding to 'accelerate implementation' of the product intervention power for ASIC and the proposed product design and distribution obligations.

The Government had previously indicated that it would consult on both of these by the end of the year. It is unclear whether the consultation can realistically occur very much before then. The additional funding may, however, help to speed up the implementation if it means ASIC will have adequate resources to properly administer the new powers.

As to the detail of the proposed new powers and obligations, we will have to wait for the consultation process. Given the importance of these proposals for the industry, let us hope it is a good one.

Other articles in this edition of Unravelled

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New ASIC funding – looking beyond the headlines
Along with the public release of the ASIC Capability Review Report, the Government announced a suite of reforms giving ASIC additional (but targeted) funding and has also sought to remove some of the shackles on hiring it believes may be hindering ASIC's ability to recruit top talent. At the same time, the Government confirmed that a 'user pays' model will be introduced for ASIC's funding needs from the second half of 2017 onwards. Read more>>

'Tough cop' ASIC vs a Royal Commission
Has talk of a royal commission turned the ASIC Capability Review into an unlikely catalyst for an enhanced enforcement agenda? With Labor pushing hard for a royal commission into the banking and financial services industry and an election looming, the Government moved swiftly to announce broad reform measures to equip ASIC with stronger powers and funding, as well as a new Commissioner with a financial crime prosecution background, to ensure that, in ASIC, Australia has a 'tough cop on the beat'. Read more>>

A long time coming: The Retirement Income Streams Review Report
Going into the 2013 election, the present Government promised a review of the regulatory framework for retirement income streams. Today, the Government finally released its report. It has been a long time coming. And while the main outcome – a new category of tax effective pensions and annuities – will be welcomed by many, there are unanswered questions and implementation may take a while. Read more>>

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