Grant Chapman (SA, Liberal Party) Share this | Hansard source

I present a report of the Parliamentary Joint Committee on Corporations and Financial Services on the statutory oversight of the Australian Securities and Investments Commission, together with the Hansard record of proceedings.

Ordered that the report be printed.

I move:

That the Senate take note of the report.

Statutory oversight of the Australian Securities and Investments Commission is a key role for the Parliamentary Joint Committee on Corporations and Financial Services. ASIC officers appear before the committee about every six months and I would like to thank them for their ongoing cooperation, especially on this occasion, as they were required to appear before our committee only about two weeks after appearing before the estimates committee discussing some of the same issues.

This report includes discussion on a number of issues relating to ASIC’s regulatory responsibilities which were raised with ASIC officials on 13 June 2006. Matters examined by the committee include: the Westpoint collapse; ASIC’s shadow shopper survey on superannuation advice; ASIC’s educational role; ASIC’s new memorandum of understanding with the Commonwealth DPP; the Vizard matter; and proposed changes to the business judgment rule.

An issue of great interest to the committee has been ASIC’s handling of the Westpoint matter. This corporate disaster has cost thousands of investors up to $400 million and many of those people have lost their entire life savings. When setting up their high-risk mezzanine investment scheme, Westpoint directors deliberately sought to put their activities beyond ASIC’s jurisdiction by exploiting an exemption in the current legislative provisions. This was achieved by issuing promissory notes of over $50,000. It meant that Westpoint companies were not subject to ASIC’s usual disclosure requirements and could not be brought into line for distributing what ASIC believed to be misleading information. The committee was particularly interested in ASIC’s response to Westpoint’s deliberate attempts to place themselves outside their regulatory reach. ASIC conceded that they had received warnings about Westpoint in 2001 and 2002. They told the committee that in 2003 an attempt was made to persuade Westpoint that they were not in fact legally justified in ignoring ASIC’s disclosure requirements, which was rejected by Westpoint. ASIC then sought to test the law in the West Australian Supreme Court, which also rejected ASIC’s claim that Westpoint’s products were in fact debentures and subject to ASIC’s disclosure requirements. Although the court ruling provided ASIC with the opportunity to wind the scheme up, there was no evidence of insolvency at the time and investors were still getting paid.

Of course, we now know that Westpoint was a house of cards that collapsed very quickly. In hindsight, ASIC might have opted to seek removal of the relevant legislative exemption rather than embark on a lengthy legal process. Unfortunately, Westpoint’s inherent fragility was not fully understood at the time. Now the damage has been done it is important that those responsible are fully investigated and, where appropriate, brought to justice. Although ASIC has not been prepared to comment on the specifics of the case, it has confirmed that the investigation will encompass the role of Westpoint directors, financial services licensees, advisers recommending the mezzanine schemes with high commissions, KPMG’s role in auditing Westpoint’s accounts and other third parties. The committee urge ASIC to pursue this matter as vigorously as possible and encourages people who invested money with Westpoint to assist ASIC with its investigation. We are also very concerned about other similar schemes that are still operating. The Westpoint saga highlights the need for ASIC to be especially vigilant in monitoring the information provided to investors by these high-risk mezzanine schemes.

The other matter of principal concern this year has been the results of ASIC’s shadow shopper exercise on superannuation advice. This exercise surveyed the advice provided by 259 individual advisers, who were representatives of 102 licensees, and captured 306 examples of financial advice provided to real consumers. According to ASIC, the survey revealed that, given the client’s individual needs, 16 per cent of advice was unreasonable; one-third of advice suggesting a switch in funds lacked credible reasons; unreasonable advice was between three and six times more likely where a conflict of interest, such as high commissions, was present; and advisers failed to give a requisite statement of advice on 46 per cent of cases, although one-fifth of these were instances of verbal advice to stay in an existing fund. If this is the case, it is of major concern. ASIC identified the major problems as being advisers not examining existing funds before recommending new ones; statements of advice not adequately disclosing the reasons for recommended action; and advisers not disclosing the consequences of switching super funds.

Significantly, most clients who had received poor advice were not aware that this was so. One of the problems identified by the committee was the restriction on advisers to provide advice only on financial products included in their licensees’ approved product lists. Where advice is given in the context of a commission based fee structure, those funds that do not pay commissions to advisers often do not appear on approved product lists. This puts advisers in a catch-22 situation with regard to the requirement to assess the existing fund of a client if advising a switch to a different fund. This catch-22 may be a factor in the survey’s apparently unsatisfactory results.

The committee is of the view that any shift to fee-for-service arrangements will naturally extend the scope of approved product lists. This will in turn improve the prospects of consumers getting advice that is best tailored to their needs. The committee welcomes industry moves towards this fee structure and believes it will improve the quality of superannuation advice. However, many consumers cannot afford or are unwilling to pay fee for service, so the commission based fee structure will continue to operate and the situation needs to be managed properly. ASIC told the committee that financial product issuers would continue to be able to pay commissions to enable their product to reach the marketplace. They stated that commission based fees represent a potential conflict of interest that is best managed through disclosure.

Given this reality, exercises such as ASIC’s shadow shopper survey are very important in ensuring that investors get the best advice. Although ASIC told the committee that this survey did not identify the worst culprits—instead, it was used primarily for data capture—it should serve as a wake-up call for the industry. It shows a level of performance that suggests that many customers are receiving advice that will unknowingly cost them a significant proportion of their retirement savings. This is unacceptable. ASIC should repeat the exercise and identify repeat offenders. The committee has recommended that ASIC undertake a similar survey next year. If results have not significantly improved, repeat offenders—those who have been found repeatedly and seriously to have breached the requirement to provide reasonable advice—should be publicly named.

Westpoint and the shadow shopper survey highlight the importance of investors being equipped to protect themselves by being financially literate. This was a theme that ran throughout our discussions with ASIC. The committee was told that ASIC had broadened its education campaign audience beyond publications such as the Australian Financial Review to include talkback radio and newspapers such as the Daily Telegraph. The committee believes that investors not realising when they have received bad advice, or being prepared to put all of their money into a single mezzanine finance scheme, suggests that many investors’ financial literacy is not what it should be when they are making vital financial decisions.

ASIC told the committee that they needed to be careful about overselling their message and putting people off. The committee understands this concern but believes that ASIC need to be more effective in teaching ordinary investors how to spot the pitfalls when making decisions about investing their savings. As important as regulation is for protecting investors, a very effective way of preventing investor losses is by educating the community on how to protect themselves. ASIC do have a very important role in that regard.

On 1 March this year ASIC signed a new memorandum of understanding with the Commonwealth DPP. This replaced the earlier memorandum agreed in 1992. We are aware of criticisms of the effectiveness of the collaboration between these two agencies. These have largely reflected concerns that ASIC should not have to seek DPP approval for criminal prosecutions and that the DPP did not respond to ASIC briefs in a timely fashion.

We recognise the appropriateness of ensuring that ASIC is not both policeman and prosecutor. ASIC also told the committee that the DPP’s responsiveness was improving year by year, which is an encouraging trend. The effectiveness of this very important relationship needs to be monitored. If the new MOU is not working then a new one should be agreed to. The committee have recommended that ASIC and the DPP regularly update them on the effectiveness of the new MOU.

The committee also discussed the Vizard matter with ASIC. The main topic of discussion this time was ASIC’s consideration of the possible perjury implications of the agreed statement of facts put before the court in their civil proceedings against Mr Vizard last year. We were informed that ASIC has assisted the Victoria Police in passing on to them the agreed statement.

We have also questioned ASIC on the proposal by the Parliamentary Secretary to the Treasurer to extend a defence contained in the Corporations Act known as the business judgement rule. This is based on the well-established legal principle that courts are reluctant to pass judgement on the merits of business decisions taken in good faith. The proposed extension of the business judgement rule would significantly broaden the defence by providing a general protection for directors, excusing them from liability under the Corporations Act, subject to certain conditions.