Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
ADDRESS TO ASIC SUMMER SCHOOL
“WORKING WITH ASIC:
THE MINISTER’S VIEW”
THE WESTIN, SYDNEY
9 MARCH 2007
ASIC’s role: ASIC’s business is market facilitation. It needs to strike the right balance between regulating by deterrence, and achieving compliance through cooperation.
Government’s relationship with ASIC: The Government, Treasury and ASIC have always worked closely together. I would encourage ASIC to continue to build on that relationship.
Good morning. Thank you, Jeff [Lucy] for that kind introduction. I’m delighted to be addressing the 12th ASIC Summer School, and am very pleased to have the opportunity to provide my perspective on how ASIC and Government can work better together.
I realise that I am speaking to quite a diverse audience here this morning, because the Summer School always attracts a very good mix of ASIC officers and industry representatives. I hope that all of you here today will gain some useful insights into the working relationship between ASIC and the Government.
There is absolutely no doubt that the entire community benefits from well-regulated corporations, capital markets and financial services. And the Summer School programme always provides a valuable forum for exchanging information and debating these issues.
In today’s global marketplace, there is a very close interconnection between financial markets. We saw a dramatic illustration of that back in 1998 in the form of the Asian economic meltdown.
Back then, Australia was effectively firewalled against the downturn because of the strong and responsible management of the Australian economy by the Australian Howard Government.
Today, Australia remains one of the strongest performing economies in the world — thanks to a favourable trading climate and the continuing sound and responsible economic management of this Government. This means Australia is well-placed to withstand future external shocks.
Ladies and gentlemen, this is precisely why the Australian Government runs a sound and stable economy. As Prime Minister Howard recently observed, since the election of the Coalition Government in 1996 the Australian economy has grown by 40 per cent into a $1 trillion powerhouse. The Prime Minister described the Australian economy as a model for other nations and said it is the envy of the developed world.
Ladies and gentlemen, it is an economy focused on growth… employment… balanced budgets… and low debt. We operate that way to ensure, by way of one example, that we are strong enough to resist aftershocks coming from other parts of the world.
The close working relationship between ASIC and the Government creates a conducive environment for this strong and stable growth to continue.
The strength of our corporate law system has not only received local acclaim, but has also achieved international recognition and praise. The IMF World Competitiveness Yearbook for 2006 ranks Australia as the top country — out of 61 — for the conduct of corporate boards and the management of shareholder value. We are ranked third for protection of shareholder rights and stock market financing.
As the Summer School draws to a close for this year, we have an excellent opportunity to spend a little time in an attempt to gain a greater understanding of ASIC’s role and how ASIC goes about its job.
Specifically, I will address ASIC’s relationships — with Government, with Treasury … and with me.
What is ASIC’s role?
First, a brief definition of ASIC’s role.
ASIC is pivotal in promoting an efficient environment for corporations and capital markets.
The Government sees ASIC’s key roles as:
- promoting the performance of the corporate sector, and entities within that sector, in the interest of commercial certainty…
- reducing business costs…
- improving the efficiency and growth of the economy for the benefit of all Australians…
And investor protection and education.
In essence, ASIC’s business is market facilitation.
To perform this role efficiently, ASIC needs strong and comprehensive enforcement powers — powers that promote an efficient regulatory system for corporations and financial markets.
In the event of misconduct, there must also be a credible threat of enforcement. Such a response, or threat of response, is vital for market integrity and investor protection.
However, it is also important that ASIC’s powers are balanced so they don’t impose unnecessary costs on business.
In order to carry out its work, ASIC is well equipped with a raft of investigative and enforcement powers. These range from compliance tools such as persuading and educating… and negotiating and settling as an alternative to launching court proceedings… to tools with a greater enforcement capability, such as conducting inspections, investigations and examinations. And, as a last resort, there are civil penalties, banning orders and criminal penalties.
But how does ASIC use these powers effectively?
Regulators must always strive to achieve a fair and just balance. A too-lenient approach will send the wrong signal to fraudsters and scam artists.
On the other hand, if regulators are too rigid, they run the risk of deterring investment in the market and discouraging entrepreneurial activity.
I believe that ASIC uses its powers to best advantage when it adopts an approach to regulation that strikes a sophisticated and sensible balance between applying the measures of deterrence, and striving to achieve compliance through cooperation. It is a responsive approach to the nature of any given situation.
And in this responsive approach to regulation, the basic question is not whether to punish or persuade, but when to punish and when to persuade.
In essence, a responsive approach recognises that there are severe punishments available to the regulator. But, in theory, the regulator should rarely need to use them — especially in situations where the regulator can achieve cooperation by demonstrating that it is economically rational for the entity in question to cooperate.
The initial objective should be to modify the behaviour of the regulated entities through a process of education and persuasion. This approach aims at achieving compliance by trading on people’s usual desire to preserve their reputation.
But, of course, if persuasion fails, there are punishments. The question then becomes one of what type of penalty is appropriate for a particular offence.
Getting the balance right is vital to the efficient exercise of regulatory powers. I believe that in the sphere of corporate law we have got the balance just about right. But it is a dynamic thing. And we need to keep working on it.
For example, the Government is currently working to see if the balance as it stands right now is in fact correct. I will talk more about that in a few minutes.
In his opening address on Monday, the Treasurer made some brief remarks about ASIC’s recent performance in promoting efficient corporations and capital markets.
I would add my voice to the Treasurer’s in reiterating that the Government is very pleased with the overall performance of ASIC. The Government’s confidence in ASIC’s ability to carry out its statutory mandate is illustrated by the significant funding increases it has received in recent years.
On funding for ASIC, I noticed the recent announcement by the federal ALP, that if Labor wins the next election, they will cut $130 million from ASIC’s budget. I find this decision surprising, to say the least, as ASIC is tackling a number of costly legal battles, including the case of James Hardie.
And speaking of ASIC’s enforcement work, I should point out that in the 2005-06 financial year, ASIC concluded enforcement proceedings against a record 352 people or companies. Not only that, but ASIC succeeded in 94 per cent of those cases.
That’s a pretty good track record, whichever way you look at it.
Much of this action was aimed at stopping misconduct in a timely manner. As well as James Hardie, there have been a number of other high profile cases, including HIH Insurance, the NAB currency traders, Westpoint, One.Tel and Sons of Gwalia.
But, as we all know, there are limits to what ASIC — and, indeed, governments and regulators worldwide — can achieve, no matter what their powers are. ASIC can fully investigate only a portion of the matters brought to its attention.
ASIC must determine the appropriateness of regulatory action or intervention in each case, taking into account factors such as the particular circumstances… the strength of available evidence … and the likelihood that any enforcement action will be successful.
Government’s relationship with ASIC
Turning now to working with ASIC…
I mentioned earlier that ASIC’s role should be seen in the context of its importance as an effective markets regulator.
ASIC does not exist in a vacuum. Government, the Ministers, Treasury and ASIC all have important roles in ensuring that ASIC can operate effectively, and the corporations law, soundly.
One of the reasons that ASIC was established as an independent body is so that its decisions and actions are, and are seen to be, independent of the political process. This is important for continued confidence in our regulatory framework.
Nevertheless, ASIC was established to administer regulatory frameworks which have been designed to implement Government policies and priorities in the areas of business regulation and financial markets. The Government therefore has a direct interest in ASIC’s operations, its policies and the way they are applied. Their potential impact on the economy and on the wellbeing of all Australians cannot be dismissed lightly.
The statement of expectations
The Government is in the process of issuing a statement of expectations to ASIC. This document will provide specific guidance to ASIC about getting the right balance between pursuing safety and investor protection, and market efficiency.
The statement will outline the objectives and priorities of Government that are to be incorporated into ASIC’s approach to administering corporate law.
It will also enforce ASIC’s responsibilities in performing its functions and exercising its powers under the ASIC Act.
Two of these functions and powers stand out as particularly relevant to today’s discussion.
First, the requirement that ASIC maintain, facilitate and improve the performance of the financial system. Clearly, this is essential if Australia is to have commercial certainty… reduced business costs… and an efficient and thriving economy.
Secondly, the requirement to promote confident and informed participation of investors and consumers in the financial system.
The statement will also reinforce the Government’s expectation that ASIC comply with our policy of best practice regulation on all regulatory proposals before they are introduced.
Within the context of Government policy and legislation, our first priority should be initiatives that minimise procedural requirements and costs to business, without compromising commercial certainty, and ensuring necessary consumer protections.
I commend ASIC’s announcement in its April 2006 Better Regulation Statement that it will rationalise and redesign its regulatory documents, and revamp its website to make them easier to find.
I also welcome ASIC’s announcement that it will develop greater expertise in analysing the impact of regulatory decisions on business… work with business to better understand the cost of compliance… and more explicitly incorporate this information in decision-making.
I fully support these ASIC initiatives, because they have the potential to improve the manner in which it administers the law.
Also, I was glad to learn that on the 15th of November last year, ASIC announced that it is establishing more formal partnerships with key industry bodies. ASIC will work with these bodies to further analyse the costs of regulatory activity.
I would also encourage ASIC to implement other recommendations made by the Banks’ Taskforce. In particular, I point to the recommendation that ASIC examine options to provide more specific guidance on meeting regulatory obligations in areas where concerns have been raised.
The Banks’ Taskforce also recommended that ASIC develop performance indicators, in addition to its existing safety measures. The performance indicators are to take into account all of ASIC’s statutory objectives, including efficiency and business costs.
The Taskforce recommended that any indicators should be detailed in ASIC’s annual report, together with guidance on their interpretation, particularly where outcomes may be influenced by factors outside ASIC’s control.
The Banks’ Report recommends that these initiatives be developed in consultation with Government. I would strongly urge ASIC to take up this suggestion, and I look forward to seeing the outcomes of this collaboration.
ASIC’s relationship with the Treasury Ministers
Ladies and gentlemen, it’s vital that, in performing its statutory functions and powers, ASIC is fully abreast of the Government’s broader microeconomic reform agenda.
While Government has the primary responsibility for setting corporate regulatory policy, ASIC plays an essential role in ensuring that we have the necessary information to respond promptly to any issues that may arise.
ASIC provides Treasury Ministers with accurate and timely advice on significant other issues in its core area of business.
ASIC’s relationship with Treasury
Turning now to ASIC’s relationship with Treasury…
The role of Treasury is to support Treasury ministers in fulfilling our responsibilities. It does this by being our principal source of advice on a wide range of issues, including policy development and maintenance, and review of performance expectations and results.
To fulfil their respective roles, Treasury and ASIC maintain a close working relationship. Treasury takes into account the views and experience of ASIC when considering and advising on changes to corporate policy and legislation.
A good example of this cooperative approach is the work ASIC and Treasury have jointly undertaken on the draft insolvency legislation.
ASIC made an important contribution in providing advice about options for implementing policies that had been identified by the Government. We provided ASIC with early drafts of the legislation, and in turn, it made a number of comments that significantly improved the quality of the draft released for public consultation.
Of course, it is always going to be the case that there are some areas where ASIC's preferred option is not taken up. This in no way implies that ASIC’s advice is not valued, but rather that there may be broader policy considerations.
In the same way that Treasury takes ASIC’s advice into account when developing policy, it’s imperative that ASIC continues to consult with Treasury. This helps to ensure that legislation works on the ground, just as it was designed to do!
As well as being extremely practical, this collaborative approach is now recognised as best practice for the public sector.
As Dr Peter Shergold, Secretary of the Department of the Prime Minister and Cabinet, said in his preface to the Management Advisory Committee’s 2004 Report on Connecting Government: Whole of Government Responses to Australia’s Priority Challenges:
“Whole of Government is the public administration of the future. It offers links and connections to the global community of ideas, knowledge and understanding essential for the [Australian Public Service] to face the governance challenges of the 21st century. It extols team-based approaches to solving the wicked problems that are endemic to public policy.”
While on the subject of collaborative partnerships, the Government accepted the Uhrig Report recommendation that portfolio bodies provide information to portfolio secretaries at the same time as they provide it to Ministers.
In practice, this means that all information, briefings, press releases and correspondence ASIC provides to Ministers should also be copied to Treasury.
ASIC should also keep Treasury informed of significant high-level meetings it has with Government ministers and other key policy figures. Keeping Treasury in the information loop will help to ensure that it can continue to fulfil its role as the principal source of advice on corporate law and policy matters.
A balanced approach to regulation
I would like to return to the theme of regulation.
For more than a decade, the Australian Government has created a regulatory environment that facilitates Australia’s impressive economic growth while maintaining important consumer and investor protections.
The Government has set its sights on sustaining this growth into the future. We will achieve this by making significant refinements to the business regulatory environment.
One of my personal initiatives to reduce the compliance burden on business is “A Simpler Regulatory System Bill”.
The Bill includes measures to reduce the regulatory burden in areas of financial services regulation… company reporting obligations… auditor independence… corporate governance… fundraising… takeovers… and compliance.
The Bill is scheduled to be introduced into Parliament this year.
Reducing the regulatory burden on business is an important task. But it will not, in itself, achieve the Government’s ultimate goal of more simple, streamlined and effective regulation.
As I mentioned earlier, an effective regulatory regime needs to be responsive. It needs to get the balance right between compliance and enforcement. And the regulator is critical.
In his address to you on Monday, the Treasurer spoke about the review of corporate sanctions that the Government will conduct this year.
This review is part of the Government’s reform programme examining remedial issues under corporate law. As well as the Treasurer’s review of sanctions, the programme includes the review of criminal penalties being conducted through the Attorney-General’s Department.
The reform programme will ensure that corporate law continues to encourage compliance, without introducing unnecessary costs or risks for business.
Ladies and gentlemen, I hope that this morning I have given you a few insights into working with ASIC — both from my own perspective, and the broader perspective of Government.
Facilitating a vibrant, dynamic and competitive business sector is a challenging task for ASIC. But ASIC is not alone in working towards this goal.
I commend ASIC and its staff on their effort so far, and look forward to continuing our productive working relationship into the future.
I also sincerely hope that you enjoy your last day at the Summer School.