Last week, before the Productivity Commission (“PC”), Greg Kirk, Senior Executive Leader for Strategy in ASIC said he welcomed the PC’s draft report that suggested ASIC become a “champion for competition” in Australian financial services. The move would still leave the ACCC as the main competition regulator but the PC believes ASIC’s mandate should be expanded so that it becomes responsible for financial services competition.
According to an article in InvestorDaily, Greg Kirk said “[a]n “appropriate” mandate would allow ASIC to “factor and appropriately balance competition into our regulatory decision-making, and address market failure as a driver of misconduct or poor consumer outcomes”.
This proposal comes out of the 2014 Financial System Inquiry that recommended the Government give ASIC the ability to consider competition as part of its regulatory role in the same manner as the ACCC has under the Competition and Consumer Act 2010 (Cth) ("CCA").
There was no mention of what such a mandate would consist of but it could possibly be similar to s4G, s45- s51 and perhaps s.55 of the CCA. This proposed mandate comes despite a Memorandum of Understanding (“MOU”) between the ACCC and ASIC signed back in 2004 where the two parties agreed to have:
- regular monthly meetings at officer level; and
- twice yearly meetings at Commissioner/ Executive Director level or otherwise as agreed
to provide information on current matters which may be of interest to each agency.
Rather tellingly, the MOU states at clause 1.3, “[t]he agencies do not intend this MOU to create legally binding obligations between them”.
I am unaware of any matter that may have been referred by ASIC to the ACCC of late in respect of anti-competitive behaviour yet there have been some instances of behaviour by some lenders that clearly ought to have been discussed. Given the PC report recommendation, on the assumption the ACCC was informed, did it decide not to act? If so, that leads to the questions of:
- when or what type of action would cause the ACCC to act?; or
- does the need for ASIC to consider competition come out of frustration between the two agencies?
More appropriate non-public service staff
Also last week, the Hon. Kelly O’Dwyer, Minister for Revenue and Financial Services, tabled legislation that if passed, will allow for the employment of people outside of the Public Service Act 1999. InvestorDaily quotes the Minister as saying “ASIC will now have the ability to attract and retain the most appropriate people to achieve its short and long term priorities.”
Without knowing the specific areas these people are to work in, it could be argued this action appears to be an acknowledgement from Government that at least some ASIC officers may not have been the most appropriate. This is a two-edged sword for the entire finance industry and if these staff have been involved in enforcement action, it’ll be little comfort for both those that believe they’ve been dealt with too harshly as well as for those the industry believes ASIC has not been harsh enough with its penalties.
One of the main issues has been lack of consistency and depending on how its administered, there will be some in industry that will argue that now allowing ASIC to take competition into account could exacerbate this. As an example, the following table highlights the penalty cost per consumer as applied to some credit providers, which includes both lenders and lessors. The table shows the number of affected consumers against the penalty levied by ASIC or the Federal Court:
|Credit Provider||No Affected Consumers||Penalty (excluding remediation, external consultancy costs, ASIC costs and all legal fees)||Penalty Per Consumer||Penalty Applied By|
|Channic Pty Ltd||8*||$278,000||$34,750.00**||Federal Court|
|Nimble Pty Ltd||7,069||$50,000 + $166,826.17||$30.67||ASIC (community benefit payment) EU|
|BMW Australia Finance Limited||15,531||$5,000,000||$321.94||ASIC (community benefit payment) EU|
|Good to Go Loans Pty Ltd||3,525||$0||$0.00||ASIC EU|
|Cash Converters Personal Finance Pty Ltd and Cash Converters International Ltd||Approx. 118,000||$1,350,000||$11.44||ASIC EU|
|ACL Group (Motor Finance Wizard)||1,511||$100,000||$66.18||ASIC (community benefit payment) EU|
|Thorn Australia Pty Ltd (Radio Rentals)||278,683||$2,000,000||$7.18||ASIC EU/ Federal Court (amount agreed but to be ratified by Court)|
The community benefit payments are for financial education and literacy, financial counselling, consumer advocacy, etc.
* This was originally 12 but reduced by the Court to 8 after some claimants either died or did not want to participate.
** Even if the number was the original total involved, the penalty per consumer would amount to $23,166.67, still well above any figure used by ASIC. Also, it should be noted the penalty shown applies to the credit provider only. It excludes the other penalties applied by the Court to the broker and to the company director personally. All of the Channic penalties were unpaid. In February 2018, ASIC was successful in applying to the Federal Court for bankruptcy and to the Queensland Supreme Court to wind up the companies involved.
As noted, the penalties stated exclude all remediation costs, the external consultancy costs arising out of the EU, any ASIC costs and all legal fees. For all of these credit providers, the remediation costs were very substantial (many measured in millions) but this should not be seen as a penalty in its own right. This was money the credit providers ASIC or the Court found they were never entitled to in the first place. The External Consultancy costs, though, are really a penalty but as the costs will vary substantially and are unknown, to arrive at a uniform method of comparing ASIC’s enforcement penalties, they have been excluded for the purposes of comparison.
Despite the fact that all these investigations involve responsible lending requirement breaches, ASIC has not sought to apply penalties against any of the other credit providers’ directors despite almost all of the others listed being either ASX-listed entities or large players in their respective sector.
Compare the above penalties to those applied to these insurers:
|Insurer||No Affected Consumers||Penalty (excluding remediation, external consultancy costs, ASIC costs and all legal fees)||Penalty Per Consumer||Penalty Applied By|
|Allianz||68,000||$175,000||$2.57||ASIC (community benefit payment)|
|QBE||35,000+||$50,000||approx $1.43||ASIC (community benefit payment)|
These 3 insurers also had to make restitution measured in millions of dollars for a range of add-on insurance indiscretions but BMW Finance had to remediate and write off more than what Swan and QBE combined had to refund yet these insurers incurred substantially less penalties. This may have arisen because they hold AFSL’s and there are no equivalent penalty provisions under the ASIC Act 2001 (Cth) to those contained in the NCCP Act 2009 (Cth) and the NCC. ASIC implemented a Taskforce to consider introducing similar penalties for such offences but just as banks will not be allowed to fail, looking at the penalty per consumer amounts when compared to those applied to credit providers, one might question if the same premise equally applies to insurers.
To be fair, though, inconsistency is not solely the domain of the regulator. It occurred last week with what many affected investors have described as being the woefully inadequate penalties handed down by the Federal Court in ASIC v.Storm Financial Pty Ltd ("Storm Financial"). The Court imposed civil penalties of just $70,000 each on the 2 directors of Storm Financial, Emmanuel and Julie Cassimatis. In the Channic case, the Federal Court was far harsher when handing down its penalties, even though the total amount of consumer detriment suffered by the 12 paled into insignificance when compared to the losses incurred by the Storm investors.
The need for change
ASIC has suggested the financial services industry’s culture needs to change and be overhauled and for some, regardless of size or prestige, we would agree this is absolutely necessary to ensure compliance. With the Government seeking approval for ASIC to use non-public service staff that are more appropriate (one presumes that means more knowledgeable), it’s little wonder there are some with whom I’ve spoken over the past 6 months that hold the opinion ASIC’s leadership needs to look internally at it’s own culture. There should be no presumption everyone in the financial services industry has the intent to cause consumer detriment.
There is wide disparity in the cost per consumer penalty as shown by the tables above and clearly, the amount of remediation has been taken into account with a number of these credit providers. However, do these figures show whether ASIC been fair and transparent? For example, should some form of scaling be applied so that larger companies incur a higher penalty per consumer cost rather than the reverse these figures highlight in order to have a proportionate effect? Comparing the two tables, the penalties arguably highlight ASIC already taking a tacit form of competition into account, even if in an unintended manner.
In the past, we saw ASIC have little appetite to take regulatory action against larger entities but that has changed in the past few years. What we don’t know is why ASIC has not pursued or required more action from the ACCC. We previously saw ASIC apply leniency in its regulatory action for larger companies and ADI’s whilst impacting far more heavily on those without the financial resources to fight it.
Of course, adding insult to injury with its soon to be implemented pay-for-service charging model will be ASIC’s ability to make the offender pay for their own investigation.
With the admissions by the banks in the Royal Commission hearings of abject NCCP and NCC non-compliance and other service failures, such as verbally advising it’s taking up to 150 days to approve a new Responsible Manager if everything’s all there and if not, up to 250 days where further information is required or simply by not acting on some complaints, it’s likely to lead to further industry dissatisfaction with the regulator. It remains to be seen whether or not there’ll be any political sympathy even if ASIC does gets its competition powers from the current Government.