A statement by Greg Medcraft, Chairman Australian Securities and Investments Commission to Senate Estimates, 3 June 2015.
CHECK AGAINST DELIVERY
Good morning, Chairman.
Thank you for this opportunity to address the Committee.
Representing ASIC today are all of our Commissioners – Deputy Chairman Peter Kell; and Commissioners: Cathie Armour; John Price; and Greg Tanzer.
Supporting the Commission are Senior Executive Leaders: Joanna Bird; Greg Kirk; Warren Day; Chris Savundra; and Tim Mullaly.
Chairman, I would like to bring to the Committee's attention some work ASIC is doing around the issue of culture.
ASIC is concerned about culture because it is a big driver of conduct in the financial industry.
It is a sad fact that bad culture leads to bad conduct and this inevitably leads to poor outcomes for consumers.
Given there is a strong connection between poor culture and poor conduct, ASIC thinks culture is a major risk to:
- investor and consumer trust and confidence; and
- the fair, orderly and transparent operation of our markets.
ASIC is planning to incorporate culture into our role as a conduct regulator.
Areas we are planning to target are those where poor practices may increase the potential for poor conduct, and therefore increase the risk to investor and consumer trust and confidence.
We intend to:
- first, incorporate culture into our risk-based surveillance reviews;
- second, use the surveillance findings to better understand how culture is driving conduct among those we regulate; and
- third, communicate to industry and firms where we have a problem with their culture and conduct.
Recently, we also announced the '3 Cs' framework on conduct risk for firms, which cover: communication, challenge, and complacency.
Chairman, where there is a problem with conduct in a particular firm, ASIC can take administrative enforcement action.
For example, ASIC can seek to remove the firm’s licence on the basis that it’s not providing its services efficiently, honestly and fairly. But there are only limited ways to address culture directly in the laws ASIC administers.
For instance, it is addressed in some parts of the Corporations Law and particularly in the Commonwealth Criminal Code.
Under s12.3 of the Commonwealth Criminal Code, a company can be responsible for a breach of certain commonwealth laws if the company's culture encouraged or tolerated the breach.
The Code defines culture as an attitude, policy, rule, course of conduct or practice.
We think that when an officer breaches a law ASIC administers - and culture is responsible - then the officers and the firm should be responsible.
We think the officer and the firm should be subject to civil penalties and administrative sanctions, as accessories.
We think the same offence should be able to be actioned by ASIC in the civil courts just like we can do now for other market misconduct.
The standard of proof for criminal and civil matters are different.
- For a criminal action the standard is beyond reasonable doubt.
- For a civil action, the standard is the balance of probabilities.
In response to ASIC’s calls, the Financial System Inquiry recommended a broad review of penalties, and this would be an opportune time to consider these issues.
Of course, this in no way suggests ASIC is turning away from criminal prosecution on culture. ASIC is still very focused and very determined on taking criminal action.
Chairman, when I talk about poor outcomes for customers, this is a polite way of saying people are getting fleeced.
And sadly those who get fleeced are usually not necessarily the country's wealthy, but everyday Australians, who might have no more than their house and their super and perhaps a nest egg.
That is, those affected by poor culture are usually those who can least afford it.
Of course, when culture is poor and investors are inappropriately sold investments that become worthless, the situation will – eventually – right itself.
But this is the thing: markets can recover, but often people do not. People are often left with a loss they cannot afford.
And that is why cleaning up culture is crucial. That is why restoring trust and confidence is crucial.
On the topic of culture, I am pleased to announce Dr Simon Longstaff, executive director of the St James Ethics Centre, has agreed to join ASIC's External Advisory Panel.
This is an excellent appointment for ASIC, as Dr Longstaff has led the centre since 1991 and has advised many significant organisations on culture and ethics.
Mr Chairman, finally, I wanted to bring to the committee's attention a paper I gave to the Davos Forum in Queensland last weekend. At this forum I discussed two topics:
- the opportunities for capital markets or markets-based financing to fund economic growth; and
- the challenges the infrastructure and small-to-medium enterprise (SME) sectors are facing in accessing finance through capital markets.
These are important topics for ASIC and my paper is available on the ASIC website.
Thank you Chairman. We are now happy to take questions.