ASIC has significant structural flaws and needs reform

The Australian Securities & Investments Commission chairman Joe Longo. Picture: Jane Dempster

The Senate’s report into ASIC is a sobering read as it reveals deep governance flaws. It also shows that ASIC has not been a priority for successive governments who have left it to wither on the vine for decades. These governments have failed to act on report after report, going back to the 2003 Uhrig inquiry that raised concerns about the governance of regulators.

Importantly, the Senate report highlights the serious ramifications of three governance flaws within ASIC.

First, the report correctly observes that ASIC’s ‘‘Swiss-cheese’’ legislation is “unsatisfactory and (has) left ASIC vulnerable to poor leadership”.

The report says “ASIC’s governance is vital to ensuring that it is an effective … regulator.” Yet, its governance structure is deeply flawed, with commissioners performing both executive and oversight functions, meaning there is no internal accountability.

Here the report found that ASIC is unaccountable, and its commissioners are answerable to no one. There are no annual assessments of ASIC’s performance, nor established criteria to measure its performance. What’s more, ASIC’s chair and commissioners aren’t subject to performance reviews and are not bound by code of conduct sanctions like ordinary employees. This led the report to conclude that “it is difficult to see how commissioners can exercise significant … functions without any formal … accountability as to their performance or conduct”. The irony is that Australia’s corporate governance regulator isn’t getting the basics of corporate governance right.

Second, the report highlights the inadequate oversight of ASIC. Despite the important work of this and other Senate inquiries, the royal commission recognised that parliamentary oversight of ASIC “has limitations”. The solution – an assessment authority called FRAA that conducts “regular and systematic reviews” – was kneecapped by a lack of support from successive governments. The result is that ASIC is not subject to regular performance assessments; unsurprisingly, its effectiveness and culture suffered. Accordingly, the report rightly recommended that the role of FRAA be revisited. Nevertheless, we should also expect more from parliamentary committees. It’s their role to undertake annual assessments of ASIC, not just ad hoc inquiries. Parliamentary oversight should not be ‘‘limited’’.

Former ASIC chairman James Shipton. Picture: Aaron Francis

Without the basics of good governance and accountability, poor strategy is inevitable; this is especially evident with ASIC’s enforcement strategy. Here the report recognised that since not every breach can be pursued, ASIC needs robust governance to make the best choices possible. ASIC’s enforcement strategy also needs to be crystal clear. To the contrary, ASIC has sent conflicting messages about its enforcement posture. ASIC’s abrupt abandonment of the royal commission-endorsed ‘‘why not litigate?’’ posture was damaging. Recognising this, the Senate found that after this posture was dropped the “evidence suggests that ASIC (was) not pursuing enough of the ‘right matters’, nor (utilising) its full suite of enforcement tools”. Alarmingly, the report warned that “without significant improvements to ASIC’s enforcement approach, the harm to Australians from corporate misconduct can be expected to continue”.

Third, the report was right to find that ASIC’s jurisdiction is too large and its resources too small. The piling on of more responsibilities to an “overburdened” ASIC must stop. ASIC already has a larger remit than its global peers. Its jurisdiction is ever-expanding, yet successive governments failed to provide commensurate funding. Except for the ‘‘sugar-hit’’ following the royal commission, the decades-long underfunding of ASIC continues.

It remains an extremely thin blue line. It is sobering that the report notes that “ASIC regulates Australia’s corporate and financial markets with a staff of less 2000”. This compared to some 20,000 police officers in Victoria alone, for example.

Accordingly, the Senate is right to recommend the reallocation of ASIC’s responsibilities to specialist agencies.

This will better enable regulatory specialisation and will help solve many of ASIC’s deep structural flaws. However, this should not be rushed as it will require careful consideration of what is the best regulatory system for Australia’s financial system.

In addition to these three governance reforms, the government also needs to address a structural conflict in ASIC’s governing legislative objectives.

ASIC is simultaneously expected to “facilitate” market participants and enforce the law against those same participants.

These objectives are irreconcilable; they also contravene the OECD’s governance principles for regulators.

Here OECD advises against “The assignment … of both industry development and regulatory functions” since this “can reduce the regulator’s effectiveness”.

These irreconcilable objectives are simply bad regulatory governance.

It is a sobering observation that, even though we had a royal commission only five years ago, a Senate report has again found that ASIC’s structure remains deeply flawed. We cannot wait for the next report to fix this.

James Shipton is a senior fellow at the Melbourne Law School, University of Melbourne and a former ASIC chair.