ASIC’s failure linked to visibility and wide remit of which made it too big to regulate
The powerful corporate cop is doing too much, and most of it is small fry in a field where unglamorous corporate crime busting has a visibility issue.
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A few years ago an idea was discussed at a meeting of ASIC commissioners over whether the regulator’s enforcement officers should be issued with jackets emblazoned with “ASIC” in big, bold letters on the back.
The idea was to wear them while they were doing a raid or investigation in the field, much like the FBI or the powerful US Bureau of Alcohol, Tobacco and Firearms – or even Australia’s own Federal Police.
The proposal was quickly knocked on the head, but was serious enough to be considered by the high-powered meeting.
It went to the heart of the problem that has long dogged the nation’s corporate regulator: Visibility.
About 98 per cent of corporate crime is unglamorous. It takes place over spreadsheets and product disclosure statements, or at the fringes of trustees or mortgage brokers.
Where regular cops are constantly in the headlines for busting cocaine rings, solving killings or tackling general mayhem, few know what ASIC really does with its near $500m annual budget.
The short answer is probably too much, and most of it is small fry.
And this brings rise to gnawing criticism that has hit the mark from the Andrew Bragg-led Senate economics inquiry into it.
After nearly two years of hearings and reviews, the committee has delivered heavy blows across a 220 pages final report into ASIC released late on Wednesday.
These criticisms range from ASIC’s lack of transparency, patchy prosecutions record, a bias towards civil over criminal cases, as well as structural and governance issues.
To remedy this, the committee has made 11 recommendations, ranging from restructuring its funding model, more disclosure around enforcement outcomes, greater action on tip-offs, and prioritising criminal litigation over civil cases to bolster its “tough on crime” image.
ASIC ‘Underenforced’
Chief among the recommendations is a split of ASIC into two separate bodies; one focused on regulating companies spinning off financial conduct of banks, insurers and super funds to a potential new entity, similar to the UK’s Financial Conduct Authority. This seeks to move ASIC away from a “do everything” corporate regulator.
Not all the recommendations hit the mark, but there is merit in refining some of its mandates our even outsourcing consumer protection to consumer-focussed regulator the ACCC.
A recent overhaul of ASIC’s management structure now sees a more focused executive team. One executive is in charge of regulation or corporate law, another for superannuation, a third for banking, there’s a fourth for insurance and another specialising on markets while another executive looks at private companies and small business.
Any proposed changes would need deeply considered with more regulation another burden for business. A wholesale split under the Senate proposal could lead to some regulatory gaps between multiple regulators.
Still, the Senate inquiry that involved three Coalition, two Labor – including deputy chair Jess Walsh – and one Green, raises important questions about one of the nation’s most important regulators.
The report concluded that corporate law was “underenforced” in Australia.
“ASIC’s response to most reports of alleged misconduct is to take no further action, and only a fraction of reports are investigated,” it said.
“For the matters where ASIC proceeds to take enforcement action, the civil penalties imposed are often at odds with the scale of the offending, and few criminal sanctions are achieved.”
“This approach fails to deliver justice...and does not deter future poor behaviour.”
In a statement ASIC, which co-operated with the inquiry, said it will take time to consider the report.
“ASIC is in court almost every day pursuing wrongdoing,” it said.
The regulator noted it was already working with Treasury to act on the recommendations from the Financial Regulator Assessment Authority’s review of ASIC’s effectiveness.
For his part, Bragg – who cut his teeth as a policy adviser with the Financial Services Council before becoming a Senator – pushed for the inquiry from opposition benches in late 2022, arguing ASIC was falling short over its enforcement role.
From cases like the collapse of Dixon Advisory and the stench around the listing of technology firm Nuix, he says Australians have paid a price.
“It is clear ASIC has failed,” Bragg says. “We need regulators to be responsive and transparent, but most of all to be focused on enforcement.”
Treasurer Jim Chalmers has yet to respond to the report. And not all of Bragg’s Liberal Party colleagues share his critisicsm of the agency.
What is ASIC? Civil vs Criminal
There’s been more spectacular failures in recent history, but Dixon is a case where ASIC’s very loud critics were right. The regulator should have gone harder by setting an example against those involved in the investment scandal.
This revolved around the high-profile and now defunct financial advisory firm which was tipping thousands of small investors into risky US property. The investments were made against their best interests, and were found to have often failed to properly disclose its conflicts that gave an advantage to the firm over the client.
It took ASIC two years to settle its case against Dixon, and the company was penalised $7.2m. However, with nothing left of Dixon the corporate entity, ASIC has said this fine was unlikely to ever be paid.
No criminal charges have been brought in relation to the firm, despite total claims in the case exceeding $386m.
Three years after its initial enforcement action, ASIC brought civil proceedings against a former director of Dixon, for alleged breaches of directors’ duties. This trial had its first hearing last month and is continuing.
It’s clear ASIC concentrated its efforts on systemic issues involved inside the Dixon business, leaving untouched the hundreds of tied advisers who were putting their clients into dodgy funds. In its own defence, ASIC has previously said its efforts were best spent on retrieving what little funds were left for investors.
ASIC also points to its high criminal strike rate. Some 90 per cent of the 44 criminal cases completed last year resulted in a conviction. The year before it was 89 per cent on 38 cases.
It launched 62 civil cases last year, with a 94 per cent success rate. It raised $185m in civil penalties.
Can ASIC act as a ‘super agency’?
The perennial question for ASIC is what can be done to lift performance?
Current and former commissioners often point to the rising remit of the regulator. ASIC’s remit is now sprawling and has grown massively as the economy has become more sophisticated.
It is a super agency that runs a corporate registry, taking in millions of new documents each year. It is across the ASX and its listed companies. Not only that, but it monitors corporate law and is a defacto superannuation enforcer shared with prudential regulator APRA.
ASIC oversees and enforces lending rules, litigation funding and is increasingly playing its bigger consumer protection role by inserting itself between the financial adviser and consumer. Currently, there is a Treasury proposal for ASIC to regulate shadowy cryptocurrencies the same way it would for listed shares. Sustainable financing is a more recent addition to its remit.
However, for ASIC to be a more effective cop, what it needs is better focus.
This will involve putting an end to piling responsibility on to ASIC for areas that it only has peripheral control over.
Superannuation is a case in point. The $4 trillion sector is now one of the biggest concentration of assets in the economy and accounts now cover tens of millions of Australians.
Much of ASIC’s time is spent chasing down product disclosure statements or trustee misconduct among hundreds of thousands of self-managed super funds.
It’s the removal of the day in and day out volume work of managing registries, or chasing up thousands of local businesses that take up the bulk of time and resources from wholesale actions.
During the Senate inquiry, ASIC conceded that its “very wide remit” impacts its approach to regulatory activity. Its own submission highlighted the scale of its regulatory task.
This covers the activities of many thousands of entities and a vast number of transactions, and means ASIC cannot progress every potential matter to investigation and enforcement.
“Like all regulators, we need to make careful, well-founded choices. We can only undertake a fraction of the potential regulatory and enforcement actions we identify through our own surveillance, reports of alleged misconduct and other data and intelligence,” it said in its submission.
Even the Australian Institute of Company Directors, which is often at the front line of ASIC’s actions, considered it “critical” that ASIC’s resourcing be increased, telling the inquiry this would help to make up for “the depth of its regulatory activities and enforcement priorities”.
Former ASIC chair James Shipton has previously spoken about a split of ASIC – separating enforcement from the day-to-day business of regulation. This would be a wholesale and potentially painful restructure, but one worth examining.
If none of this works, a flash jacket might just be the answer.
Originally published as ASIC’s failure linked to visibility and wide remit of which made it too big to regulate
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