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Australia – Big Changes In Store For ASIC.

24 June, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

In Brief

 

With the announcement of significant budget cuts over the next five years and the pending reports of the Financial System Inquiry and the Senate Inquiry into the performance of the Australian Securities and Investment Commission (ASIC), big changes are anticipated for ASIC over the coming year.

 

Summary

 

The Federal Government’s budget will cut funding to ASIC by AUD 120.1m over the next five years, with an initial reduction of AUD 43.9m, or close to 12%, in appropriation revenue in 2014/2015.1 Staffing levels are anticipated to be reduced by 209 from 1,782 in 2013/2014 to 1,573 in 2014/2015. This follows a voluntary redundancy program implemented in advance of the budget, through which 150 jobs have already been cut. Together, the staffing cuts will equate to a loss of 19 per cent of the ASIC workforce by the end of the next financial year.2 The Government has also set aside an additional pool of funding to investigate the sale of the ASIC registry.

 

The announcement of the cuts comes at a time when the performance and functions of ASIC are being closely scrutinised. The Federal Government’s National Commission of Audit report, released on 1 May 2014, recommended that ASIC’s registry functions be transferred away from ASIC, its consumer protection functions be transferred to the Australian Competition and Consumer Commission (ACCC), and its financial literacy functions cease.3 It considered that the overlapping functions of ASIC with those of the Australian Prudential Regulation Authority (APRA) and the ACCC, should be considered in the context of the Financial System Inquiry. An interim report on that Inquiry is due to be released in July of this year.4

 

In addition, the Senate Economics References Committee is due to release its report on the Senate Inquiry into the performance of ASIC no later than 26 June 2014.5

 

So What Is Anticipated For ASIC Over The Coming Year?

 

First, it appears increasingly likely that ASIC will move towards a ‘user-pays’ funding model, based on a costs recovery approach for ASIC’s regulatory functions. ASIC itself proposed such a system of funding in its April 2014 submission to the Financial System Inquiry.6 ASIC chair Greg Medcraft told a Senate estimates hearing on 4 June 2014 that he believed that a user-pays funding model, through an outcome-focussed user-pays model, could drive economic efficiencies and strengthen resilience.7

 

Under ASIC’s proposed model, regulatory costs would be recovered specifically from those who engage in regulated activities and those who benefit from a well-regulated market and financial system. Current fees would be rationalised to simplify the fees paid by industry participants using ASIC services. According to ASIC, this would involve a combination of fees for services and levies, which would be based on the recovery of costs attributed to regulatory activities. Fees for services would be directly linked to the costs incurred by ASIC in delivering a particular service, and stakeholders engaged in those regulated activities would be charged the fee each time the service was required. All costs not recovered by fees would be aggregated at the stakeholder-group level, and would form the basis of levies charged to external stakeholder groups on an industry basis. Those levies would cover the costs of regulatory activities generally related to those groups, but not to individual entities.8

 

Secondly, ASIC’s consumer protection functions may be moved out of ASIC, following the National Commission of Audit’s recommendation that ASIC’s consumer protection functions be transferred to the ACCC and an increase in funding to the ACCC by AUD 68.5m over the next four years.9 Further details of a possible shift are likely to become clear with the release of the report of the Financial System Inquiry in July of this year.

 

Thirdly, it is likely that ASIC’s registry functions will be privatised, with the Federal Government setting aside AUD 11.7m to investigate the sale of the registry,10 echoing Mr Medcraft’s comments to the Senate Economics References Committee in February 2014 that the corporate register is ‘frankly, a technology business’ and there could be ‘huge benefits’ in separating the registry business and ‘merging it with other government registries to leverage the economies of scale from [its] Siebel management system’.11

 

Finally, it appears that ASIC will increase fees and scale back on market surveillance in response to the funding cuts, following Mr Medcraft’s comments to a Senate estimates hearing on 4 June 2014. Mr Medcraft told the hearing that he could recoup funding by charging higher registration fees for financial planners, and repeated previous warnings that ASIC will need to scale back on proactive market surveillance and rely more heavily on tip-offs in response to the cuts.12

 

What This Means For The Industry

 

In the short term, the funding cuts, staff reductions and potential restructuring are likely to result in increased fees, longer times for ASIC to carry out functions, and less capacity for investigation and enforcement, especially in non-priority areas. A work schedule published by ASIC in 2012 showed that resources were already stretched at that time, with only 58 people covering the 21,000 companies monitored by ASIC, 40 staff covering the audit professions, 26 staff covering the investment banks, and 29 staff covering financial service providers. At that time, the big four companies were reviewed, on average, only once every 18 months, the next 10 biggest companies once every 2.5 years, the top 25 investment banks once every 15 months, the 220 hedge funds once every 5.5 years, and the top 20 financial service providers once every 1.7 years.13 With a further reduction in resources, it is clear that compromises will have to be made.

 

For now, the Federal Government has left it to ASIC to determine how it allocates its funding, stating only that ‘ASIC will adjust its priorities to ensure it continues to meet its statutory objectives’.14 It is not clear whether this will mean any particular areas of ASIC’s work will be effected more than others or cut altogether. For example, the National Commission of Audit report considered that financial literacy functions should cease altogether.15 However, in the longer term, if ASIC move to a self or industry funded model, the nature of fees charged by ASIC may change considerably.

 

End Notes:

 

  1. Australian Securities and Investments Commission 2014-2015 Portfolio Budget statement
  2. Fear job losses will hobble ASIC
  3. The Report of the National Commission of Audit – Phase One
  4. Address to the Australian Business Economists by David Murray, Chairman of the Financial System Inquiry
  5. Inquiry into the performance of the Australian Securities and Investments Commission – Interim report
  6. Financial System Inquiry: Submission by the Australian Securities and Investments Commission
  7. ASIC looks to user-pays to make up funding shortfall
  8. Financial System Inquiry: Submission by the Australian Securities and Investments Commission
  9. Budget 2014: ACCC gets $10 million to monitor carbon tax repeal
  10. Budget 2014: ASIC’s funding cut in move away from financial sector oversight
  11. Budget 2014: Funding slashed for Australian Tax Office and ASIC as government moves to privatise regulator
  12. ASIC looks to user-pays to make up funding shortfall
  13. $30m lighter, corporate plod settles the bill
  14. Australian Securities and Investments Commission 2014-2015 Portfolio Budget statement
  15. The Report of the National Commission of Audit – Phase One

 

herbert smith Freehills

 

For further information, please contact:

 

Elizabeth Macknay, Partner Herbert Freehills

elizabeth.macknay@hsf.com

 

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