ASIC’s strategic outlook: compliance and culture are key

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ASIC has published its Strategic Outlook for 2014-15, which, according to the ASIC website, is a new initiative which sets out the key risks ASIC sees in the markets it regulates, and how ASIC will respond – prioritising its tools of surveillance and enforcement.

The Outlook contains a mixture of old and new messages and insights from the regulator into its role and the expectations placed upon it. Parts of the Outlook repeat content published in other ASIC releases during 2014, for example the importance of listed entities being vigilant about disclosures during investor and analyst briefings. But, in addition to delivering its standard message of ‘detect, understand and respond’, the Outlook includes some interesting commentary from its Chairman and reveals the trends continuing to shape the regulator’s focus for the 2014-15 period.

Size is irrelevant

In his Chairman’s message, Greg Medcraft philosophises on the financial year to date, and fires some fighting words targeted at those entities who might believe that they are immune to its authority, such as those perceived to be ‘too big to fail‘.

Mr Medcraft said ASIC ‘makes the best use of its resources and powers to prioritise and manage the risks we see’. Mr Medcraft also promises that ASIC is ‘committed to learning from our past experiences’ and that it will take enforcement action against entities ‘regardless of their size or reputation’.

These commitments are not new. They echo some of Mr Medcraft’s statements made to the Parliamentary Joint Committee, in an opening statement given in September 2014, referring to the findings the Reportfrom the Senate Economics References Committee.

Perhaps of more value to interested parties is where ASIC intends to focus its priorities for this remaining financial year.

Key challenges

ASIC’s key challenges for 2014-15 are:

  • the need to balance the competing interests of a free market-based system, and investor and financial consumer protection;
  • digital disruption in our financial services and markets;
  • structural change in our financial system through growth of market-based financing, largely driven by growth in superannuation;
  • financial innovation-driven complexity in products, markets and technology; and
  • the impact of globalisation on out financial markets.

In relation to the first dot point, ASIC has a particular focus on ensuring that entities have a ‘culture and systems that emphasise the best interests of their customers’.

In addition to listing its key challenges, ASIC identifies its key risks in the areas of conduct, innovation-driven complexity, globalisation and the expectation gap. This article will discuss the conduct and expectation gap risks.

Gatekeeper conduct

Dividing the gatekeeper responsibilities between markets and financial services, ASIC emphasises the individual responsibility of all participants in maintaining investor trust and confidence.

Markets

In addition to repeating its concern about analyst and investor briefings, ASIC also reminded entities to manage conflicts of interest, given the significant investor losses that can arise if they are not managed properly.

To manage the risks posed by poor gatekeeper conduct in markets, ASIC will continue to focus its surveillance on insider trading, market manipulation, continuous disclosure breaches and poor governance practices and systems.

Financial services

ASIC emphasised the role that Australia Financial Services Licensees can play as gatekeepers to ensure the quality of financial advice being provided by advisers. ASIC expressed its ‘concern’ about the culture of financial services businesses and the incentive structures they use (something the Freedom of Financial Advice reforms are intended to address) and urged financial services businesses to:

  • have policies, procedures and place to comply with their legal obligations; and
  • implement controls that are followed and reviewed for effectiveness.

These key elements of a good governance program will help financial services businesses to ensure that the ‘welfare of their customers should be at the heart of their business’.

To manage the risks posed by poor gatekeeper conduct in financial services, ASIC will focus its surveillance on compliance in large financial institutions, and advice and dealing activities in:

  • financial advice firms (by targeting the six largest financial advice institutions to test how they comply with high-risk areas of the law); and
  • responsible entities operating managed investment schemes (by continuing to identify ‘red flags’ and focus on high-risk entities).

Expectations gap

ASIC was the subject of widespread criticism in 2014 from a broad range of instigators on many areas under the regulator’s control. For example, its deficient powers in relation to protecting whistle-blowers and its failures to properly address issues of fraud, forgery and allegations of a cover-up inside the Commonwealth Bank’s financial planning arm, Commonwealth Financial Planning Limited.

Perhaps in an attempt to defend itself, ASIC uses the last page of the Outlook to address the ‘mismatched expectations about the outcomes’ it can achieve ‘within the regulatory settings established by Parliament’. Declaring that it ‘cannot eliminate market risk, prevent all wrongdoing or ensure compensation for investors who lose money’ ASIC attempts to clarify the ‘expectations gap’ that consumers and businesses might have about its authority and regulatory reach, especially in light of the extensive negative publicity it has received.

After all, as ASIC itself points out, it is subject to controls from the Federal Government and its ‘role or powers to address wrongdoing are limited, such as when an appropriate remedy is not available’.

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