Defined Terms and Documents

Consumer advocates back expanded powers for ASIC to probe banks  June 1, 2015

An independent consultant was brought in to review One Big Switch's practices on the request of ASIC. Photo: Sasha Wooley

Consumer law advocates have written to Assistant Treasurer, Josh Frydenberg, encouraging him to support new powers to allow the corporate regulator to enter financial services firms and intervene on the design or distribution of products that might harm customers. 

The financial system inquiry chaired by David Murray recommended the government give so-called product intervention powers to the Australian Securities and Investments Commission to "enhance the regulatory toolkit available where there is risk of significant consumer detriment". ASIC requested the powers in its submissions to the inquiry pointing to similar ones for Britain's Financial Conduct Authority (FCA). 

Mr Frydenberg has been closely looking at the inquiry's recommendation after visiting the FCA in January, where the powers were discussed. On Friday, Mr Frydenberg said the government would respond to the inquiry "over the course of 2015". 

Banking sources said the government's position on product intervention powers will be one of the most closely watched issues in that response.

The Australian Bankers' Association has no principled objection to the recommendation but has expressed concerns to the government about the potential for the powers to be abused in practice. 

In his letter to the Assistant Treasurer, Gerard Brody, the chief executive of the Consumer Action Law Centre, which is a member of ASIC's Consumer Advisory Panel, argued the powers would allow the regulator to act before consumers were harmed. This would be an improvement to the status quo, where ASIC needs to wait for a breach of the law by a particular institution to occur before acting.

He also called for the powers to be broad and apply not only to investment products but consumer leases, payday loans, and add-on insurance. 

In a submission to Treasury, two other members of the ASIC consumer panel, UNSW professor Dimity Kingsford Smith and colleague Marina Nehme, said the powers would have helped ASIC prevent customer losses sustained in the Banksia unlisted debenture collapse in 2012 and the collapses of Westpoint in 2005 and Storm Financial in 2008.

Proactivity emphasised

They also said the inquiry's call for the powers to only be used by ASIC as a 'last resort' should be interpreted broadly. They should be triggered "after failure of attempts by ASIC to resolve matters with providers by guidance, persuasion and negotiation" and make no sense if "last resort" means "at the end of the formal enforcement road" because the whole point of the powers is to provide ASIC with a mechanism for "pro-active, preventitive and timely intervention". 

If granted, the powers would allow ASIC to go into banks or other financial services companies and amend marketing materials, insist on warnings to consumers, restrict distribution or, in extreme circumstances, ban products. The banks are concerned the powers might stifle innovation and make it more expensive to develop and sell products. 

ASIC chairman Greg Medcraft and commissioner Greg Tanzer both used speeches last week to warn that the regulator is taking a more aggressive approach towards banking culture and is concerned about how remuneration incentivies might be creating perverse behaviour. Australian Prudential Regulation Authority chairman, Wayne Byres, expressed similar sentiments in a speech on Friday in Singapore.

"Strengthening culture, like strengthening capital, is critical to long-run stability," he said.

Resilience improved

The UNSW academics said if the powers are properly designed, they may "head-off systemic consequences of concentration and improve financial system resilience" and help ASIC regulate fintech firms - "an economic industry composed of companies that use technology to make financial systems more efficient."

The financial system inquiry report said the powers should be subject to judicial review, which Mr Brody, Professor Kingsford Smith and Ms Nehme agree with.

The UNSW pair also called for the powers to be extended into superannuation distribution.

"If there are wholesale market disclosure or conduct failures which would affect a class of superannuation members unfairly, leading to significant or widespread consumer detriment, we think intervention may be justified," they said.