Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, August 2014.

The Senate Economic References Committee Inquiry into the performance of ASIC handed down its final report on 26 June 2014. The Committee examined many aspects of ASIC's work. However, a particular focus was ASIC's treatment of misconduct by financial advisors and other staff at Commonwealth Financial Planning Limited.

The report contains 61 recommendations (11 of which were suggested by ASIC itself). This article examines some of these recommendations from the perspective of ASIC's market supervision and surveillance functions, although we note that the Committee did not concern itself directly with this aspect of ASIC's performance.

User pays funding model

The Committee recommended that ASIC's current funding arrangements be replaced by a user pays (cost recovery) model. ASIC supports the introduction of a user pays model that better reflects the costs associated with regulation. Our experience has shown that a user pays model can drive economic efficiencies and provide incentives for industry to improve standards and practices.

Since the transfer of market supervision to ASIC in August 2010, ASIC's new responsibilities have been funded by the Government subject to cost recovery from industry.  We have observed that market participants are now being more careful in how they design and implement algorithms. In this way, fees have acted like a proxy control on poorly written algorithms and messaging noise.

Skills and experience of ASIC staff

The Committee recommended that ASIC staff have the necessary skills and experience to identify complaints and reports of a serious nature requiring attention. ASIC's Market and Participant Supervision (MPS) team employs  highly qualified staff with many years of experience and qualifications in trading, markets, economics, accounting, quantitative finance, mathematics and law, among others. These staff have significant expertise in the mechanisms of the market and are trained to recognise and respond to market misconduct. Senior staff supervise the handling of all markets misconduct matters.

Identifying deficiencies in internal compliance arrangements

The Committee recommended that ASIC review its surveillance activity with a view to making it more effective in detecting deficiencies in licensee's internal compliance arrangements. MPS has been enhancing the way we identify compliance issues by augmenting our risk based approach to reviews of licensees. We review a licensee's control environment, including preventive controls such as having adequate policies, procedures, processes and training to prevent errors. In addition, we perform sample testing resulting in increased detection of deficiencies in a licensee's risk and compliance arrangements.

Where compliance deficiencies issues are identified, we undertake additional action, including on-site visits, document requests or thematic reviews. In addition, we maintain an open and active dialogue with market participants to address compliance concerns.

Handling of complaints

The Committee recommended that ASIC undertake an internal review of the way it manages complaints from retail investors and consumers. The Committee also recommended that ASIC establish a dedicated channel for complaints from key professional bodies, industry bodies and consumer groups.

In addition to ASIC's real time market surveillance activities, we allocate resources to examining complaints made by individuals and entities about markets issues. Individuals or entities wishing to lodge a complaint about the conduct of a market participant are encouraged to do so via ASIC's markets hotline or email address:

Hotline:         1300 029 454

Email:  market.participants@asic.gov.au

Market participants are also encouraged to raise any trading issues or concerns with us at an early stage. All complaints and reports are thoroughly reviewed and addressed by staff with relevant markets expertise in accordance with ASIC's practices and procedures. On occasion, this may involve meeting with the complainant to seek further information.

Publishing surveillance outcomes

The Committee recommended that ASIC make the findings of its surveillance (of financial advice businesses) public. The MPS team publishes key market supervision and surveillance outcomes and statistics every six months. The upcoming market supervision report for the period 1 January to 30 June 2014 will be released next month.

Conclusion

We are proud of our strong performance as the markets regulator, which has been recognised internationally. In 2012, the International Monetary Fund published the findings of Australia's Financial Sector Assessment Program (FSAP). The FSAP review commented that "ASIC has rightfully earned its reputation as an effective and credible enforcer of market regulation".[1] The FSAP review also noted that "The Australian legal and regulatory framework for securities markets exhibits a high level of compliance with the International Organization of Securities Commissions (IOSCO) Principles."[2] We will continue to strive to ensure that Australia’s financial markets are fair and transparent and supported by confident and informed investors and consumers.