Andrew Leigh

ASIC Supervisory Cost Recovery Levy Bill 2017

Tuesday 30 May, 2017

I rise to speak on the ASIC Supervisory Cost Recovery Levy Bill 2017 and related bills. Labor is supportive of the Australian Securities and Investments Commission industry funding model on the principle that ASIC's regulatory costs should be borne by those entities it regulates. Under this model, in the 2017-18 financial year ASIC's regulatory costs will be recovered from the corporate sector and the financial services sector instead of being borne by the taxpayer. These costs are anticipated to be $240 million in 2017-18. The opposition notes that the cost recovery levy is similar to the arrangements currently in place for funding the Australian Prudential Regulation Authority.

The principle that regulation is paid for by the entities that have created the need for it rather than by the Australian public is uncontroversial. Reflecting ASIC's function as the corporate regulator, the levy will apply to all companies and in 2017-18 is expected to raise $81 million, with costs ranging from $5 a year for small proprietary companies to $662,000 for listed public companies with a market capitalisation above $20 billion. Reflecting ASIC's function as the financial services regulator, additional levies will apply to entities in the financial services sector, and these levies are expected to raise $159 million from the financial services sector in 2017-18. We note that some existing ASIC fees, the government has foreshadowed, will be reduced in lieu of the cost recovery levy.

The total levy is to be implemented in a rather complicated manner. ASIC's regulatory costs are apportioned between subsectors, with about 50 different formulas to be included in the regulations. To take one example: payday lenders are expected to be liable for $2 million of ASIC's regulatory expenses in 2017-18. Each payday lender is expected to pay a $2,000 minimum levy, with an additional graduated levy to be charged based on the amount of credit provided. The regulations will be supplemented by an annual legislative instrument made by ASIC to specify the amounts in each formula so that costs relating to particular subsectors are attributed to that subsector.

The disallowance periods in this bill are shortened from 15 sitting days to five sitting days in order to provide greater commercial certainty. An adjustment is also made to the default position under subsection 42(2) so that if a motion is unresolved in accordance with that subsection at the end of the disallowance period, a provision of the instrument is not automatically taken to have been disallowed.

We do note the significant complexity in the way the ASIC mechanism has been designed. A lot of the heavy lifting of this model is left to the regulations, which have only just been released in draft form. Labor will be watching implementation closely. We note too that the regulations will be the centre of action, and so making sure that those regulations are appropriately drafted will be absolutely critical.

If you read the minister's second reading speech to this bill, there is too much rhetoric about tough cops on the beat and encouraging regulatory compliance. These are words that will ring hollow to anyone who has been watching the government's performance in this space. Since coming to office in 2013, the coalition government slashed ASIC's funding by $120 million in the 2014 budget—reflecting a massive free pass to corporate and financial sector misconduct.

We should reflect on that as we look at this bill today, which Labor supports. For all the talk of those opposite, we do know that this is the government that has cut funding to the corporate regulator. The government took no action to unwind those cuts until Labor proposed a royal commission into the banking and financial services sector in April 2016. Those cuts to ASIC had a devastating impact—the loss of staff and of expertise, and on the ability of the regulator to address misconduct appropriately. Cuts to ASIC have hamstrung ASIC and continue to have an ongoing impact today.

That is similar to the record of the coalition on financial protections more broadly. It was not so long ago that the Liberal and National parties were voting against Labor's Future of Financial Advice reforms and voting against reforms that were all about improving trust and confidence in financial planning. They were voting against reforms that would give ASIC, the very subject of this bill, its much-needed powers to oversee financial advice. Upon coming to office the coalition attempted to unwind Labor's Future of Financial Advice reforms under the guise of removing red tape. This so-called red-tape repeal, taking powers away from ASIC, was only ever going to advantage those who would seek to rip off honest borrowers and lenders.

In debating this bill, it is absolutely critical to understand that anything relating to financial services, as this bill does, must take into account the need for a royal commission into the banking and financial services sector. In the wake of Storm, Trio and Westpoint, and the many other scandals—in the wake of the bank bill swap rate scandal and the Comminsure scandal—it is critical to get to the bottom of what has gone on in the banking and financial services sector. It is critical that the government stops standing in the way of a banking royal commission, because only a banking royal commission can go to the bottom of the cultural and systemic issues that have led to thousands of Australians having their lives ruined.

A Productivity Commission review is merely going to be about competition in the banking sector, but it cannot get to the bottom of the misconduct. It cannot forensically examine documents and witnesses, follow leads to get to the bottom of these scandals. Neither can the House economics committee hearings serve the role of a royal commission. A cup of tea with big bank CEOs is no substitute for a proper royal commission.

Since Labor called for a royal commission in April last year we have seen more and more misconduct. In the past 18 months alone the big banks have been forced to pay in excess of $300 million in fines or compensation for fraud, misleading conduct, illegal conduct or breaching consumer protections. Since this bill relates to ASIC, I will take just one ASIC example. In October 2016 ASIC released its report Financial advice: fees for no service. The report revealed that Australia's biggest banks have spent years charging over 200,000 customers fees for services they did not receive—yet more proof that we need a royal commission into the banking and financial services sector. That October 2016 report revealed that AMP, ANZ, CBA, NAB and Westpac will have to pay almost $180 million—excluding interest—in compensation, because again they have failed to do the right thing. A recent update by ASIC, on 19 May 2017, says that that figure is now over $204 million in fees that were charged for financial advice that was never received. In an Senate estimates hearing in April, ASIC advised that the number of customers affected is now up to 330,000. These were not just technical glitches. In its October report, ASIC found that these organisations:

…prioritised revenue and fee generation over the delivery of advice and services paid for by their customers.

Customers were charged fees for advice from financial advisers who had left or retired, and for services that involved nothing more than three unanswered phone calls. ASIC found:

…advisers were allowed to have many more ongoing advice customers on their books than they would have been able to monitor or advise on an annual basis. For example, some advisers had many hundreds of customers—often having 'inherited' these customers, and the stream of fee revenue, from other advisers who had departed from the licensee.

ASIC found that licensees did not have systems in place to ensure that services were provided in return for the fees being charged.

We have seen the pressure that has been place on ASIC by the big banks. A freedom of information request by The Australian's Ben Butler reports a case in 2014: '… as ASIC worked on a press release about losses caused to customers who used NAB's Navigator investment platform, a worker in the regulator's media unit wryly emailed colleagues: "This is one of those releases that has been drafted by everyone other than ASIC!"'

We had an example in relation to a review of Macquarie Equities Limited, the Macquarie Group's financial planning arm, by EY. According to The Australian, Adrian Borchok, a senior manager in ASIC's enforcement team, was questioned about a draft press release about the matter. Mr Borchok was asked: 'In paragraph 5, do we really want to say "superficial", as Macquarie Equities Limited did engage EY to do a review of their compliance system?' Mr Borchok responded: 'I think the use of "superficial" is appropriate because it reflects the situation. Further, the EY review was a sham, therefore they are getting off easy with "superficial".'

Then there were documents relating to the Commonwealth Bank's media releases. Adele Ferguson wrote of one of the documents: 'In one press release dated May 2014 that relates to ASIC imposing new licence conditions on two of CBA's financial planning arms, an original draft press release called it for what it was: the business had "misled" ASIC over its compensation scheme and the methodology used to compensate clients. But the word "misled" was dropped by an ASIC executive.'

These documents only emerged after a two-year battle between The Australian and ASIC through the freedom of information process. This again raises significant concerns about the cuts that have been made to ASIC under this government.

Labor supports these laws that ensure that the corporate sector pays for regulatory costs within ASIC. We also recognise that it is important to have appropriate laws in place to curtail dodgy phoenix operators. The tax commissioner today told a Senate estimates committee, 'I could appoint you as a company director without you even knowing it, and have me then controlling the company.' An expert has recently been quoted as saying, 'You can almost register your dog as a company director, literally.' That is why last week Labor—Brendan O'Connor, Senator Katy Gallagher and I—announced a package of measures to crack down on dodgy phoenix activity, including a unique director identification number, with a 100-point identity check, which makes it as difficult to become a director as it currently is for a regular Australian to open a bank account. That call for a director identification number from Labor has been supported by the Productivity Commission, the Australian Institute of Company Directors, the Australian Small Business and Family Enterprise Ombudsman, the Australian Chamber of Commerce and Industry, Master Builders Australia, the Australian Council of Trade Unions, the Australian Restructuring Insolvency and Turnaround Association, and the Phoenix Project, which comprises experts from Melbourne University Law School and Monash University Business School. The only significant entity in Australia that does not support a director identification number is the Turnbull government.

Labor's package on dodgy phoenix directors would also increase penalties associated with phoenix activity, introduce an objective test for transactions depriving employees of their entitlements and clarify the availability of compensation orders against accessories. We cannot let dodgy directors off the leash, because they are hurting workers, firms and taxpayers. A report seven years ago estimated the cost of phoenix activity to be $3.2 billion per year: $0.6 billion to taxpayers, $0.7 billion to employees and $1.9 billion to business. Labor's package to crack down on dodgy phoenix directors is a pro-business measure, because it is honest businesses—the vast majority of businesses are honest—that are the worst hurt by dodgy phoenix activity. The cost today is almost certainly well above that $3.2 billion estimated from five years ago.

As we support this bill, we call on the government to provide the same measure of bipartisan support to the introduction of a director identification number and other measures to make sure that dodgy phoenix directors can no longer rip off taxpayers, workers and honest businesses.