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Legislative framework ‘has not been observed by firms’

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Reporter 7 minute read

The new chairman of ASIC has said that the financial services firms have not adequately been the “first line” of compliance, warning that such failures “ultimately impacts on the effectiveness and fairness of the entire financial system”.

While at the Australian Council of Superannuation Investors Annual Conference recently, the chairman of the Australian Securities and Investments Commission (ASIC), James Shipton, told delegates: “I spoke recently about the regulatory structure in Australia’s financial markets. I highlighted that this structure was, very deliberately, not designed as a police state.

“And while ASIC and our fellow financial regulators sit at the heart of the regulatory structure, the system was deliberately designed to have a number of regulatory mechanisms and a range of compliance agents in addition to the regulators themselves.

“This is the legislative framework in which we operate. This structure is designed to have as the ‘first line’ of compliance the firms themselves.


“This is not a theoretical construct, nor spin; it is the law of the land. But sadly, as we have seen from ASIC’s own work, and the work of the royal commission, this has not been observed by firms.”

Highlighting section 912A in the Corporations Act, which says that licensed firms “must take reasonable steps to ensure that [their] representatives comply with financial services laws”, the ASIC chair said: “This is an important provision since our regulatory structure was deliberately, and consciously, designed so that employee representatives are not licensed.

“Nevertheless, too often I see a large difference with what firms consider as their statutory obligation to take ‘reasonable steps’ to ensure good behaviour of their representatives — especially when compared to the expectations of our regulators, legislators and the broader community.

“In addition to this obligation, firms are required, by law, to provide financial services ‘efficiently, honestly and fairly’ and they ‘must comply with financial services laws’.

“Taking all these obligations together, the first line of responsibility for ensuring compliance, and the fairness of financial services provided, rests with firms themselves. They are crucial compliance and regulatory agents in our system.


“This is the law. This is how our system was designed. And a firm’s failure to live up to these obligations ultimately impacts on the effectiveness and fairness of the entire financial system.”

However, the ASIC chair acknowledged that the regulator’s role was to “intervene when firms fail in their first line [of] regulatory responsibilities”, highlighting that the financial services regulator had:

  • banned more than 800 people from providing financial services or credit since 2011;
  • banned more than 390 people from being directors since 2011;
  • obtained $35.1 million in civil penalties this financial year;
  • recovered more than $1.7 billion in compensation for consumers since 2011, including $230 million this year;
  • obtained over 160 criminal convictions in the period since 2011 and 19 so far this financial year;
  • banned over 100 people from providing financial services or credit this financial year; and
  • disqualified more than 40 people from being directors of companies this financial year.

Mr Shipton concluded: “These are important outcomes which show that ASIC is determined to play its part in making sure our regulatory system works. And I am personally committed to using every inch of our powers and tools to get the outcomes that the community deserves.

“And while we have been trying to do our job, unfortunately, all too often, the firms who have failed in their first-line responsibilities have made matters worse by not cooperating with us and, in some unacceptable cases, actually obstructed our work.

“These firms have not just failed in their first-line compliance duty; they have jeopardised the entire regulatory structure.

“What’s more, they have endangered the financial system they are meant to support. This cannot stand — because if firms continue to fail to step up to their responsibilities, the integrity of our regulatory structure, and our financial system, is undermined.”

Royal commission hearings, round 3, begin today

The comments were made ahead of the third round of hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which will look closely at the conduct of several of the leading banks in respect of their dealings with small and medium enterprises, in particular in providing credit to businesses.

The first round of public hearings, held between 13 March and 23 March, considered issues concerning the treatment of consumers by banks and financial service providers in connection with credit products, which included residential mortgages, car finance and credit cards.

The initial round identified breaches of responsible lending obligations by Australia’s major banks and third-party intermediaries, with ANZ, the Commonwealth Bank and its third-party subsidiary Aussie Home Loans, NAB and Westpac all appearing before the commission.

The second round of public hearings, which commenced on 16 April, has investigated the conduct of financial advisers, including the treatment of consumers, compliance with the law and community standards and expectations, and the sufficiency of the current legal and regulatory structure.

Among the revelations of misconduct identified by the commission were AMP’s concession that its financial planning division charged clients “fees for no service” as well as inappropriate advice issued by advisers that adversely affected the financial wellbeing of customers.

This week, the third round of hearings will commence, addressing issues relating to small and medium-sized enterprises (SMEs).

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Legislative framework ‘has not been observed by firms’
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