Here are some selected snippets from the transcript of the PJC hearing oversighting ASIC, of 27 October 2017, the last for Mr Medcraft in his ASIC role. Many other issues were covered, including whistleblowing, financial advice, insurers, and scam emails.
The selected items covered here are:
- harmful but legal conduct – sometimes it takes a while for the law to change, Senator, as we know. You would know this with your push on liquidators, for example. That’s the message. That’s the hard part, when we see things and we go, ‘This is just ridiculous’. But the law takes a while to catch up.
- receivers – the receiver went into a property. The sheep were flyblown soon afterwards. The sheep were dying. The property went to rack and ruin with weeds et cetera.
- identity – has ASIC given any consideration to trying to have a single, if you like, ASIC identification number as opposed to purely as a director issue? ASIC maintains a number of registers. Individuals appear on multiple registers…
- Industry funding – this is by far and away amazingly transformational because already people are starting to realise the impact of it. If you want to take us on in court, go for your life because, guess what, next time we go to bill industry funding, you’re going to pay for us spending time in court as a part of the share of industry funding. People are just starting to wake up to how powerful that price signal is. That will be transformational
- It hasn’t happened yet, but it is happening—getting out of the Public Service and having that freedom;
- Law enforcement – we want it to be a hellhole for white collar criminals. … It would be good for ASIC to have a secondary reporting line to Attorney-General’s to strengthen the fact that we are a law enforcement agency. … perhaps the Federal Court should cover the jurisdiction for criminal matters, and juries hear white collar matters on a civil basis. Having ordinary people assessing white collar criminals I think is something to think about.
All these and more raise a few issues about ASIC, for later comment.
The snippets follow:
Harmful but legal
“In addition to considering compliance with the law, a big challenge in what we do is what I call harmful but legal conduct. That’s often where it’s right on the margins of the law and it causes harm to individuals and affects trust and confidence. If we think about it, we often talk about social licence. Often it is legal, but for policymakers it may be the next area that comes to their attention, if not the court’s. So a warning, I think, to all gatekeepers is if it’s harmful but legal, you actually had better be careful because it may become illegal very soon or it may destroy your reputation. I think that is the new world.
“A six-year view of where we’ve come over the last six years, which I think you’ve seen today. Obviously, there have been over 7,000 high intensity surveillances, $1.4 billion in compensation from this to consumers, 140 criminal convictions and 80 people jailed, 670 people banned from financial services and credit and 340 people disqualified or removed from corporations. We’ve completed over 1,000 investigations. I’ll pass over to Peter.
Mr Medcraft : ‘Harmful but legal’ is really a big issue around the world. It is the hardest thing for regulators, but it’s a really interesting thing to focus on. Often what we see, for example, with the add-on insurance is that it’s legal but very harmful. I do think it’s a really interesting thing to focus on, frankly.
Senator WILLIAMS: Mr Medcraft, I want to follow on from Senator O’Neill about the issue of ‘harmful but legal’. If we are looking after consumers, if something is harmful to consumers, is it up to the legislators to make it illegal? I can’t see how something can be harmful but legal. If it’s harmful, it’s wrong for people.
Mr Medcraft : Well, I think sometimes it takes a while for the law to change, Senator, as we know. You would know this with your push on liquidators, for example. That’s the message. That’s the hard part, when we see things and we go, ‘This is just ridiculous’. But the law takes a while to catch up. That’s where my message to gatekeepers is to say, ‘Well, hopefully that process is speeding up. So don’t think that you can actually get away with it may be as long as you could in the past because social media and the 24-hour news cycle is actually bringing it to the fore much quicker. Actually, maybe you shouldn’t just go there to start with.’ I’m happy to share with you a very good presentation at the IOSCO board last week on harmful but legal conduct.
Senator WILLIAMS: When you see the harmful but legal, bring it to the lawmakers.
Mr Medcraft : Actually, if I share with you what I will, you will see that this is how regulators deal with this issue around the world. You’ll probably find this quite interesting. It’s actually a lot of things we’ve been talking about for a number of years. Generally with what you’re focused on, if you think about liquidators or advisers, it’s legal but it’s harmful. That’s where the gap often is and the law has to catch up.
Mr Kell : And I should be clear—
Senator O’NEILL: This is philosophy, about a deontological structure or an ethics based structure.
Mr Medcraft : Well, if you can get culture right, you shouldn’t go anywhere near harmful, right?
Senator O’NEILL: It would probably go in law, then.
Mr Kell : I should be clear, just so we’re clear for the committee. In relation to the sale of add-on insurance, while there was some conduct that would fall into the ‘harmful but legal’ category, we are of the view that there was substantial conduct that fell into the harmful but was clearly in breach of the law category. If we do not get appropriate responses from the insurers to question about remediation, we will consider enforcement action.
Mr Medcraft : But it is the area to focus on because that is where often, unfortunately, people think, ‘Oh, well. It’s legal.’ And it’s on this side of legal. Basically, it’s harmful. You don’t want people to even think about going there.
Receivers and banks and borrowers
Senator WILLIAMS: Mr Price, we have another inquiry into lending to primary producers. We know some on contract with receivers. There has been a lot of flak about the receivers. Under section 420A, we had one case where we had a property valued at $3.3 million in 2009. I saw the valuation. It was valued at $1.5 million when receivers went in. That was bare with no cattle or any stock on it. It was sold for $850,000, including 800 head of cattle, which is basically giving the property away. In these agreements, it says that the receivers shall be the agent of the mortgagor and neither the receiver nor the bank shall be personally liable for the receiver’s acts or omissions. Is that a standard contract, do you know?
Mr Price : Yes.
Senator WILLIAMS: In other words, they work for the bank, and the receiver or the bank have no responsibility for any omissions or wrongdoing?
Mr Price : My understanding is that those sorts of indemnity clauses are very common in those sorts of contracts. I think it would do well for people who write those sort of contracts to think about whether the new unfair contracts legislation has any impact, although I would say that legislation is more geared towards what I would call retail consumers necessarily than businesses.
Senator WILLIAMS: Perhaps you could have a look at it. I saw one receiver years ago—
Ms Armour : I just want to check that the clause you read out talked about the receiver being the agent of the mortgagor, which is the borrower, and that is normal. So they are not the agent of the bank.
Senator WILLIAMS: So they are agent for the borrower, yes?
Ms Armour : Yes.
Senator WILLIAMS: Neither the receiver nor the bank shall be personally liable for the receiver’s action. So they are replacing the borrower to do the job?
Ms Armour : Borrower, yes.
Senator WILLIAMS: I saw one case where the receiver went into a property. The sheep were flyblown soon afterwards. The sheep were dying. The property went to rack and ruin with weeds et cetera. They should be responsible for that, but I think under this contract it was the same.
Mr Price : I would reiterate that we have done quite a bit of work with the banks around unfair contract terms recently. I think it is quite important that people turn their minds to those sorts of clauses.
Unlawful phoenixing and director identity
Mr KEOGH: I want to ask a question that largely relates to anti-phoenixing; it is about the director identification numbers. Where are we at? We have discussed it a number of times.
Mr Price : Yes. The minister for financial services recently released a paper which talks about a number of proposals in relation to phoenixing more generally. One of those proposals was in relation to a director identity number. As I have indicated previously, introducing a director identity number is something that will require legislative support. It’s not something that ASIC can simply do.
Mr KEOGH: I presume it would also place a workload on ASIC in terms of dealing with what I might call the legacy database that you would have to clean?
Mr Price : Yes. I suppose there’s a question about how to deal with not companies that are new companies and directors that are new directors but people who are directors of companies that are already on our database. It is important to be aware that there is an annual review of company details. Potentially it could form part of that. I suppose a really important thing to think about is exactly how you might implement a director identity number. For example, at one level, it could be something like a 100-point identity check. There are something like 2.1 million directors, so you have potentially 2.1 million people seeking to prove to someone that they’ve got the 100 points to do their identity check. So there’s a cost impost as part of that. For people in rural and regional areas, it may actually cause difficulties. Another possibility is to rely on an existing identifier that many people might have—something like a Medicare number or a tax file number. All of these matters are subject to consultation and obviously will be discussed in due course. But that’s a process that is underway.
Mr KEOGH: There’s a similar issue that we’ve discussed previously, which relates to authorised representatives and AFSL holders, where people can apply for a separate licence and have their history on the old licence and reappear with a new licence. The same issue emerges in terms of having consolidated records for those other registers that ASIC operates.
Mr Price : Yes.
Mr KEOGH: I think you agreed with the committee previously that it would be good to try to clean up that issue as well. Has ASIC given any consideration to trying to have a single, if you like, ASIC identification number as opposed to purely as a director issue? ASIC maintains a number of registers. Individuals appear on multiple registers, not multiple times—
Mr Price : Yes.
Mr KEOGH: so you would have a single identifier for the purposes of ASIC’s regulation.
Mr Price : That is certainly an idea that is worthy of consideration. Let me put it another way. It could be very inefficient if there are a range of ways that are required to identify people and they’re not consistent.
Ms Armour : At the moment, the director is just filling in some forms. They don’t need to identify. You can be John Smith or Jonathon Smith or whatever. While the law is that way, we would just end up with potentially three different identification numbers for the same person. So it doesn’t solve the issue of who the person is, but it might help us with managing data. We could still have the wrong information.
Mr KEOGH: So it would be helpful as long as you had the legislative backing to force it in?
Ms Armour : Yes. To force the full identification, yes.
Mr Medcraft : But I do think that government is making pretty good progress to a unique identifier; that’s my understanding at the moment. To be honest, it would be better to have one single national ID system which you could apply.
Mr KEOGH: There are probably some broader problems that arise from that. But in the scope of just the databases and registers that ASIC operates, it would be a starting point.
Mr Medcraft : It would be a good starting point. I would hope that we can get to a national ID sooner rather than later, actually. I always found that the benefit in the States is your social security number is a very helpful single ID system, which I think is a good step forward, actually. This would be a good way of, at least before that, improving the way things are, frankly.
Mr Price : For companies I thought we had this system at the moment where you’ve got an identifier.
Mr Medcraft : For companies we certainly have identifiers.
Mr Price : Yes.
Mr Medcraft : This is more about individuals.
Mr Price : This is individuals, yes.
Mr Medcraft : Because we do have a company identifier, yes.
Mr KEOGH: Who also hold AFSLs.
Ms Armour : On that score, there’s a move to legal entity identifiers, which is an international mechanism. The ideal would be actually if we were able to move our regime into that global system.
Mr Medcraft : The LEIs we are rolling out across the world.
Mr KEOGH: So in the context of the consultations that are happening now in relation to anti-phoenixing, to which all of these things relate but they obviously have broader impact, are these issues that ASIC has raised with government and asked government to consider?
Ms Armour : Yes.
Mr Price : Yes. We have said for a little while that we would support a director identification number. The very important thing we think for us is to make sure that that’s implemented in a way that is efficient, I suppose, for both people who want to form companies and regulatory bodies as well. It is just how you do it.
Mr KEOGH: But is the broader issue of either an identification number across registers or an Australian identification number something that ASIC has taken to government?
Mr Price : No. Equally, as far as the people we license go, we have a bit more flexibility in terms of our powers to ask for things as compared to—
Mr Medcraft : We are keeping across the development of it.
Mr Price : Absolutely. I will go back to my initial point. I think that it’s quite important that the systems align. Otherwise there’s a real risk that we could build something that’s inconsistent with the broader framework around directors generally. That creates inefficiency, duplication and problems later down the track.
Mr Medcraft : … The most transformational change at ASIC is industry funding. That is by far and away amazingly transformational because already people are starting to realise the impact of it. If you want to take us on in court, go for your life because, guess what, next time we go to bill industry funding, you’re going to pay for us spending time in court as a part of the share of industry funding. People are just starting to wake up to how powerful that price signal is. That will be transformational. It hasn’t happened yet, but it is happening—getting out of the Public Service and having that freedom.
Senator O’NEILL: … I want to put on the record that I think one of the significant things that has happened in the six years I’ve been sitting in this committee is a shift in the way in which your language has moved from being that of a regulator to a law enforcement agency. I think it’s become absolutely more and more evident as time has passed. …
Mr Medcraft : I think I said yesterday that we want it to be a hellhole for white collar criminals. I think that comment I made a few years ago obviously did prompt a lot of attention. On my earlier points, I do think many of the changes we are seeing, such as changes to penalties and more resourcing, are moving us all very much in the right direction. I think it is a journey. What we want is for Australia to be seen as a place where you don’t even want to think about breaking the law and that it is a hellhole for white collar criminals. To that end, I think I’ve mentioned unfinished business. It would be good for ASIC to have a secondary reporting line to Attorney-General’s to strengthen the fact that we are a law enforcement agency. In terms of the court administration process, one of the things I’ve said is perhaps the Federal Court should cover the jurisdiction for criminal matters in addition to the state courts. Perhaps we should think about having juries hear white collar matters on a civil basis. Having ordinary people assessing white collar criminals I think is something to think about.
Any comment welcome.