29/05/2009

According to the chair of the Parliamentary Joint Committee on Corporations and Financial Services, Bernie Ripoll, ASIC is not responsible for preventing the collapse of financial services organisations such as Storm Financial and is not even capable of doing so. 

 

He’s reported as saying “In the lead up to Storm Financial's very spectacular collapse it was audited and had been compliance checked by ASIC and got through with flying colours. There was not necessarily anything wrong with the organisation as it stood on paper, or in its systems, or the checks and balances that go with determining whether or not the organisation was meeting its obligations under law.  Questions such as how the products were sold and what the products did are issues that ASIC is not currently responsible for.”

 

How interesting.  What then are we to make of Section 1(2) of the ASIC Act which says that ASIC must strive to, among other things,

 

a)     maintain … and improve the performance of the financial system and the entities within that system in the interests of … the efficiency and development of the economy

b)    promote the confident and informed participation of investors and consumers in the financial system, and

c)     take whatever action … is necessary in order to enforce and give effect to the laws of the Commonwealth …?

 

Or Section 12A(2) of the Act which says “ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system”?

 

Did I miss something?  Isn’t promoting consumer protection a role that would make ASIC responsible for preventing the collapse of a company that’s caused such massive hardship and loss to so many vulnerable people?

 

The ASIC Act contains a list of behaviours that are prohibited and that ASIC is supposed to be monitoring, preventing and enforcing including:

 

• misleading representations (s.12BB)
• unconscionable conduct (s.12CB)
• misleading or deceptive conduct (s.12DA)
• false or misleading representations (s.12DB)
• misleading conduct in relation to financial services (s.12DF)
• using harassment or coercion in the supply of a financial service (s.12DJ)
• mandatory implied warranties of due care and skill in the supply of financial services (s.12ED)
• mandatory implied warranties that the financial services will be reasonably likely to achieve the consumer’s particular stated purpose. 

The list goes on.  How much more power could they possibly need?  The power to investigate, I hear you say.  OK – how about Section 13(1) of the ASIC Act which says that ASIC may make such investigation as it thinks expedient for the due administration of the corporations legislation where it has reason to suspect

 

• contraventions of corporations legislation or of any other law concerning the management or affairs of a body corporate or managed investment scheme,
• fraud or dishonesty relating to a body corporate or managed investment scheme, or
• the existence of ‘unacceptable circumstances’. 

An intellectually disabled woman is required to sign every page of a 105-page SOA to prove that she understands a highly complex investment structure – how much more unacceptable can the circumstances get!

 

What else can ASIC do? How about

 

• examine persons (s.19)
• require their attendance at such examinations (s.19(2))
• administer an oath or affirmation during the examination (s.21)
• require the examinee to answer (s.21)
• inspect documents of all kinds (s.29, s.33)
• require documents to be produced (s.34)
• apply for seizure warrants (s.35) 

There is a whole division in Part 3 of the ASIC Act dealing with ASIC’s powers in relation to investigating financial products.

 

The Parliamentary Joint Committee must explain their claims that ASIC is neither responsible for nor capable of investigating situations like those that arose in the Storm Financial collapse in light of all these duties and powers set out in the ASIC Act, which seem to have been designed precisely for this sort of situation.

 

If their claim that Storm Financial passed ‘with flying colours’ the audits and compliance checks done by ASIC, then surely the point is that those audits and compliance checks were either not rigorous enough or were not effective enough to deal with the real issues, or both.  There is a difference between having the required power and using it effectively. 

 

Turning to the other assertion: “Questions such as how the products were sold and what the products did are issues that ASIC is not currently responsible for.”

 

We’ve already noted above how s.1(2) and s.12A(2) of the ASIC Act both give ASIC the duty to ensure that the sale of financial products is conducted in a satisfactory manner.

 

But beyond that, surely the provisions of Parts 7.6 and 7.7 of Chapter 7 of the Corporations Act make it quite clear that ASIC has a major role in the proper sale of financial products.  To say otherwise ignores the very major role of the regulator, a role that until the Parliamentary Joint Committee’s remarks no-one had ever really doubted.

 

ASIC can:

 

• licence people providing a financial service
• vary, suspend or cancel such licences
• ban or disqualify people from providing a financial service
• extract enforceable undertakings as to behaviour of those providing financial services
• interpret, require strict compliance with and enforce the provisions of the Corporations Act. 

To fully appreciate ASIC’s role you need only go to their website where they make it quite clear what their substantial powers are and their preparedness to use them.  See for example their “FIDO” section.

 

It is not uncommon for our political masters to demand new powers when things go wrong.  The current bikie laws are a classic example. There were already plenty of laws that prevented the kind of anti-social and criminal behaviours that the bikies are accused of, but State governments believed they should be seen to do something so they passed new (unnecessary) laws and trumpeted about law and order.

 

So it is with ASIC.  There is every indication that ASIC is not a mouse - it had plenty of power to deal with the Storm Financial situation.  The fact that it may not have done so adequately means that it may not be a lion either.  

If you have any questions please contact Townsends Business & Corporate Lawyers on
8296 6222.