HOUSE OF REPRESENTATIVES, 10 FEBRUARY 2020
The Hayne royal commission's final report observed ASIC's 'deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing.' Commissioner Hayne raised a number of concerns about the policies and culture of ASIC and these were issues that our committee's deliberations went directly to.
We spoke to ASIC about their optimal litigation success rate. They advise that in the five years to 2018-19 their enforcement litigation success rate has been above 90 per cent. That does suggest that while they're having a good record in court, they may not be sufficiently aggressive in taking cases to court. The conversation over the optimal litigation success rate will be an ongoing one between our committee and ASIC.
ASIC has also been doing some important work around disclosure. The old approach to financial advice used to be that if you educated and disclosed, that would take care of matters. This somehow assumes that people have all the time in the world to acquire appropriate financial education and read long-form documents. In the real world people are time-poor, don't necessarily have the time to invest in getting their heads around the details of financial instruments and don't have the time to work their way through long-form disclosure. ASIC's new work has confirmed that long-form disclosure is often not an effective consumer protection. That work is informed by behavioural economics research over the last few decades. When a product has more than two or three features, it becomes extremely hard for even a well-informed consumer to choose between the different products.
ASIC's report explained:
'Sludge is where there are unnecessary frictions in the market that make it very difficult for a consumer. It is easy for them to get into a product but difficult to get out of a product. But also, it is very difficult for a consumer to lodge a complaint. Sludge gets in the way, ultimately, if the accountable person within that firm, let alone the directors, knows that complaints are being lodged.’
The committee will continue to monitor ASIC's work in this area, but I do commend ASIC on their work on looking at the limitations of disclosure and the importance of simple disclosure.
The committee also quizzed ASIC about their work on the rate of return of self-managed superannuation funds. ASIC's work finds that funds with balances under $50,000 delivered, in the most recent available year, a return of minus 15 per cent; for funds from $50,000 to $100,000, a return of minus five per cent; and, for funds from $100,000 to $200,000, a return of minus half a per cent. It's pretty extraordinary that these funds are, on average, losing their members' money and that even self-managed superannuation funds with balances under $500,000 have lower returns, after expenses and tax, compared to industry and retail super funds. ASIC's work to ensure that people aren't adversely steered into self-managed superannuation funds is important, and the committee will continue a conversation with them over that issue.
I also raised with ASIC the issue of tracker mortgages. ASIC wrote what I thought was a good note in 2016, encouraging lenders to offer tracker mortgages. They seem to have backed off from that view and say that they're now ‘agnostic’ regarding tracker-rate mortgages. In my view that's a mistake, and I'm yet to see evidence that overturns ASIC's well-thought-out statement in 2016.
ASIC also talked to us about their views on a beneficial ownership register. Australia's share register is unusually opaque, making it very difficult to find out who really owns Australian shares. It's too easy for shell companies to hide the true owners of firms, and this can lead to difficulties in combatting financial crime if regulators are unable to find out who the true owners of firms are. ASIC spoke about the benefits of beneficial ownership registers. I would like it if the government moved more speedily on this. It was a commitment made by the former minister Kelly O'Dwyer, which the government has subsequently abandoned. A beneficial ownership register would be of great benefit to anyone who wants to understand who truly owns Australian firms.
Finally, I commend ASIC on their important work on the commissions paid by fund managers to advisers and stockbrokers selling listed investment companies and listed investment trusts. As I understand, ASIC advice to Treasury in August of last year said:
It is hard, on the historical data available, to justify maintaining the stamping fee exemption from conflicted remuneration for these products.
That advice also went on to say:
Higher stamping (selling) fees for LICs and LITs are correlated with worse investment returns and bigger discounts to NTA [net tangible assets].
I commend the work that the shadow minister for financial services has been doing on this—he'll be speaking on that matter later today or tomorrow—and the work of journalist Christopher Joye, from The Australian Financial Review, who has been a strong critic of the decision by the coalition to open a loophole which allowed these highly risky investments to be sold at a disadvantage to consumers.
Authorised by Paul Erickson, ALP, Canberra.