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ASIC’s outlook on risk and law enforcement

As Cuffelinks marks its 100th edition, it is an opportune time to explain to this important audience the role of ASIC as Australia's integrated corporate, markets, financial services and consumer credit regulator and law enforcer.

Making sure Australians have trust and confidence in the financial system is at the heart of everything we do. We regulate entities at every point from ‘cradle to grave’ - from their incorporation to their winding up – and also look after the interests of the consumers they serve in an increasingly digital world.

Our regulatory priorities are to:

  • promote investor and financial consumer trust and confidence, and
  • ensure fair, orderly and transparent markets.

ASIC is a law enforcement agency. We use around 70% of our regulatory resources on surveillance and enforcement. A key aspect of what we do is holding gatekeepers to account – identifying and dealing with those who break the law. Where we see non-compliance, we will act quickly and decisively through our 'detect, understand and respond' approach.

Five risk drivers

It is helpful to understand the circumstances that drive risk to investors and financial consumers. In our efforts to understand these drivers, we have identified five broad areas that are having significant impact:

First is the tension between a free market-based system and investor and financial consumer protection. This is influenced by the increasingly global economy, the compliance culture and systems of those we regulate, and the shifts in consumer sentiment and financial literacy.

Second is digital disruption. In financial services, crowdfunding and peer-to-peer lending platforms are disrupting traditional ways of accessing capital. In our markets we see digital disruption in high-frequency trading and dark liquidity. And there will be more digital disruption as we see advances in, for example, the use of mobile technology for financial transactions, increased use of ‘big data’ by financial services providers to customise their marketing.

Third is structural change. There has been a global shift towards market-based financing. In Australia this has been driven predominantly by growth in the superannuation sector. We also have an aging population. The government's recent Intergenerational Report covers that in detail.

The structure of the Australian funds management industry also continues to evolve with consolidation among the four major banks expected to continue. Financial markets too are seeing competition intensifying and affecting capital raising, secondary trading and post-trade infrastructure.

Fourth is financial innovation-driven complexity. Complex products are available to investors and financial consumers, but can be misunderstood or mis-sold.

Technology-driven financial innovation continues to change how markets interact, including with investors. The rapid pace of technological change has also brought challenges of cyber-resilience to the fore. At the same time Australians' use of information and communications technologies is high on a global scale.

Fifth, and finally, is globalisation. The global financial system has become more integrated, competitive and complex. Australia's financial markets are more integrated with international markets than ever before, and financial facilities, services and products are increasingly provided across borders.

Responding to key risks

Against this background, we have identified key risks that fall into the areas of conduct, innovation-driven complexity, globalisation and expectations gap.

We are undertaking proactive risk-based surveillance of high risk areas that will have the greatest impact on investors and financial consumers and the sectors and participants we regulate. In particular, we are concentrating on financial advisers and responsible entities operating managed investment schemes.

We also continue to undertake reactive surveillance to detect possible wrongdoing. Where there are issues, we take action without fear or favour.

ASIC's latest six-monthly enforcement report, detailing outcomes achieved between 1 July 2014 and 31 December 2014, recorded 348 enforcement outcomes. This included 204 criminal actions as well as civil and administrative (e.g. banning or disqualification) actions, and negotiated outcomes, including enforceable undertakings.

These outcomes were achieved across the financial services, market integrity, corporate governance and small business areas.

The report highlights ASIC’s ongoing focus on tackling serious corporate fraud and loan fraud and ASIC’s use of civil penalty proceedings to enforce the law.

At the same time, there are some drivers of risks that we cannot influence, and risks that we cannot address within the current regulatory settings. There may be more on this when recommendations of the recent Financial Systems Inquiry are further considered by government.

More positively, some of the risks we have identified may not crystallise.

A more detailed explanation of our work across these risk areas can be read in our Strategic Outlook on the ASIC website.

Expectations gap

Different expectations and uncertainty about outcomes in the regulatory settings can undermine confidence and behaviour.

This is magnified by uncertainty about whether the regulatory settings – established by Parliament – will be effective in more difficult economic conditions. Investors and financial consumers may also underestimate the risk they can handle when things get tougher.

We use our resources and powers to ensure that the financial system is robust and operates in the long-term best interest of Australian consumers. However, we cannot eliminate market risk, prevent all wrongdoing or ensure compensation for investors who lose money.

And finally, it is also important that the sectors and participants we regulate must look to, and act in, the long-term best interests of financial consumers to ensure that trust and confidence in the Australian financial system remains strong.

 

Peter Kell is Deputy Chairman of the Australian Securities & Investments Commission (ASIC).


 

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