
Economics References Committee - 20/02/2014 - Performance of the Australian Securities and Investment Commission

DYER, Mr Bruce, Member, Corporations Committee, Business Law Section, Law Council of Australia

KEEVES, Mr John, Chairman, Business Law Section, Law Council of Australia

Committee met at 09:47

ACTING CHAIR ( Senator Bushby ): I declare open the second hearing of the Senate Economics References Committee's inquiry into the performance of the Australian Securities and Investments Commission. The inquiry was referred to the committee by the Senate on 20 June 2013, and on 14 November 2013 the Senate agreed to the committee's recommendation that this inquiry be re-adopted in the 44th Parliament. The reporting date is 30 May 2014.

To date the committee has received over 400 submissions, the majority of which have been made public and are available on the committee's website. These are public proceedings, although the committee may determine or agree to a request to have evidence heard in camera.



I remind members of the committee that the Senate has resolved that Commonwealth officers should not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when or how policies were adopted.

I now welcome Mr John Keeves and Mr Bruce Dyer, representing the Business Law Section of the Law Council of Australia. I invite you to make a short opening statement. Is there anything additional you would like to say about the capacity in which you appear today?

Mr Keeves : I, like Mr Dyer, am a member of the Corporations Committee of the Law Council of Australia. We contributed to the Business Law Section's written submission to this committee. The Corporations Committee is made up of experienced corporate lawyers from around Australia drawn from law firms, the independent bar, in-house lawyers and academics. I would like to take a few minutes to highlight some key points from our written submission. By way of introduction I note that the terms of reference of this committee are wide ranging and that we have confined our submissions to matters relevant to our expertise.

First, we consider that generally ASIC performs well but is under resourced in its wide-ranging responsibilities and high community expectations. ASIC's responsibilities have expanded markedly over the past 20 or so years and now cover market surveillance, business names, credit licensing, aspects of insurance and superannuation and so on as well as corporate regulation. In relation to community expectations: we think there may be some misunderstanding of ASIC's role. It is not a prudential regulator like APRA, and investments and licence holders that are regulated by ASIC are not subject to merits review other than compliance with basic standards. Disclosure is the principal means by which the legislation seeks to protect investors in relation to financial products.

Second, Australia's financial markets generally have a very good reputation around the world. They benefit from Australia's adherence to the rule of law, mature regulatory structures and generally good performance from our financial regulators, including ASIC, APRA and the Takeovers Panel. ASIC's performance should not be judged with perfect hindsight. Corporate regulation requires difficult choices about allocation of scarce resources, and complex decisions must be made under conditions of great uncertainty—for example, difficult decisions about whether to pursue prosecutions and regulatory litigation where there are often material uncertainties about the relevant facts and applicable law at the time the decision is made to commence proceedings. As with business judgements, these decisions should not be assessed with the benefit of hindsight and of knowledge that was not available at the time of the decision.

Third, ASIC is subject, in our view, to an effective accountability framework: independent commissioners accountabilities to a single minister, oversight by parliamentary committees and administrative and judicial review of various decisions. We do not believe that there is evidence that the accountability framework is in need of reform or that changes would improve ASIC 's performance.

Fourth, the BLS does not consider that the legislation under which ASIC is established hinders its performance or is in need of substantial reform. There are some, limited areas of corporate regulation where reform should be considered and which we can elaborate on; but wholesale reform is not required, and any reform must be based on evidence and a cost-benefit analysis. In our submission new laws are not always the best solution to a perceived regulatory problem, and finance and investment cannot, by its very nature, be made risk-free by additional regulation.

Fifth, the BLS believes that upholding rule-of-law principles in corporate regulation is important not only as a matter of principle but also to underpin the legitimacy of the system and to promote certainty. Mechanisms that undermine the rule of law—such as the reversal of the onus of proof, strict liability subject to due diligence defences and infringement notices—should not be overused in corporate regulation. Complex and uncertain legislation, including that which occurs as a result of frequent change, also detracts from the rule of law.

Sixth, the BLS considers that ASIC's general approach to publicity in connection with investigations is appropriate—that is, ASIC should not, unless the public interest requires it, make public comment about an ongoing investigation. That said, the BLS—the Corporations Committee—does have some concerns about ASIC's use of publicity in relation to infringement notices and enforceable undertakings. For example, people may pay infringement notices for a variety of reasons quite apart from whether they consider the allegation justified. I hope I hope may be forgiven for saying that a company might quite rationally pay an infringement notice simply to avoid paying their lawyers more to contest the notice.

That concludes our opening remarks; thank you.

CHAIR ( Senator Mark Bishop ): Thank you very much, Mr Keeves. Mr Dyer, do you have anything to add?

Mr Dyer : No.

CHAIR: I think the acting chair for his indulgence. Thank you very much for your submission, Mr Keeves. It was succinct and, as usual from the Law Council, quite on target. I have a couple of questions to ask you.

Yesterday we heard some very critical and hard commentary from a couple of accountancy organisations. They were very deliberate and they were very direct, and basically they commented that: their level of engagement with ASIC, from the most senior levels down to managerial level, was flawed; ASIC was uncooperative; the message that the accountancy organisations wished to relay on behalf of their membership was neither listened to, appreciated nor paid heed to; and it is generally a most unsatisfactory relationship between a couple of professional organisations of high standing and a regulator with a very, very key role in Australia's economy.

Later that afternoon we had opposite evidence from the union—on behalf of employees—and from a couple of organisations in the financial planning area with major membership around Australia, who were in some respects more balanced, if I can put it that way. Your submission is quite deliberate in its comments, and can be read as basically saying, 'The organisation works well but in certain areas, like any other organisation, can improve itself.' That is my reading of your remarks this morning and of your submission.

Would you care to comment on the nature of your organisation's relationship with ASIC at the most senior level, from the governing body down to the more senior directors and more senior managers whom you interchange with on a regular basis and on the perceptions you have of your membership's attitude to their engagement with ASIC?

Mr Keeves : I will endeavour to respond to that if I can just make a comment by way of trying to put things in context. I think the accountancy bodies are in a slightly different position to the Business Law Section and the Law Council in the sense that ASIC regulates some of their activities in relation to liquidators, auditors and—obviously—financial reporting.

I have not had the benefit of seeing the transcript or hearing the evidence which was given yesterday, so I cannot and probably ought not to comment specifically on what was said.

CHAIR: No, I am interested in your organisation's level of engagement with ASIC.

Mr Keeves : What I was leading to was that our organisation's engagement with ASIC is of a different character. Our activities are not regulated by ASIC and our members' interactions with ASIC are on behalf of clients who may be regulated. The context is different and our members' experience would be coming from, if you like, a different point of view. So there may be comments that are made on behalf of the accounting bodies which are from their perspective and we would come at it from a slightly different perspective.

Regarding the relationship of our members, I cannot speak in relation to specific examples or specific members. Because this is not something that had been discussed and considered by our committees, I cannot give a committee view. I would say that there would be a range of opinions. There would be specific examples where people might have particular views, positive and otherwise, and I do not think I can comment specifically about that.

As to the, if you like, high-level interaction with the business law section as the business law section and the corporations committee, I would say there is a good level of interaction. A number of the senior members of ASIC's staff, including commissioners, interact with our committees. We conduct annual workshops and they are attended by academics, regulators of various agencies, people from departments as well as people from the legal profession. So there is engagement at that level. But, in terms of a qualitative assessment of what our relationship is like, I would say it is a good and, I think, a valuable working relationship from both sides.

CHAIR: Would you describe it as professional?

Mr Keeves : Absolutely.

CHAIR: Does your corporations committee have representatives on it from the major law firms in New South Wales or around Australia?

Mr Keeves : Around Australia.

CHAIR: All the big firms?

Mr Keeves : And a number of smaller firms, a number of members of the independent bar and academics—a broad variety. Parts of the committee meet in each of the mainland states. There is a wide variety of membership.

CHAIR: So it is widespread representation from across Australia in all of the subsections of the industry?

Mr Keeves : I could not say it was representative of all sections of the industry when it comes to the people who advise parts of the finance industry, but certainly our area of interest and expertise is corporate regulation and things that relate to directors, chapter 6 takeovers, fundraising and—

CHAIR: Those who have day-to-day interaction of the Corporations Act and regulations thereunder.

Mr Keeves : Yes, but I cannot claim to represent all of them.

CHAIR: Your commentary is fair. Within your membership across those interests around Australia, have they had cause to raise with you and ask you to pursue formally with ASIC the nature of your relationship, including level of engagement, responsiveness of ASIC and their ability to listen and learn from commentary of your members?

Mr Keeves : I may ask Mr Dyer to comment as well, but certainly the performance of ASIC, in the sense of issues that may have arisen in interactions with ASIC, is a regular topic of conversation. If there are issues that arise, they are discussed and I would say that there would be occasions where, if there had been concerns, they would from time to time be raised with appropriate ASIC officers.

CHAIR: If those concerns are raised, has the response, in your assessment, been appropriate and professional on the part of the relevant ASIC officers?

Mr Keeves : I am not sure I can answer that in the sense that that would require actually looking into the specific occasions. I cannot off the top of my head think of occasions where I can say there were particular concerns that were not addressed, but, in the very nature of things, there may be issues that the regulator—

CHAIR: You cannot think of any occasion where particular concerns were not addressed?

Mr Keeves : We have not been through a process of asking our members that question.

CHAIR: No, but it is one of our terms of reference.

Mr Keeves : I think I ought to add that we were selective in the submissions that we made, and that was not one that we were commenting on.

Mr Dyer : I can speak as to engagement in relation to the corporations committee and specifically the corporations committee in Melbourne, because the committee meets in different cities around Australia. Certainly for the corporations committee in Melbourne ASIC has been very good at sending along appropriate people and quite senior people, including at times commissioners, to those meetings on a regular basis, which the committee as a whole has very much appreciated. It is useful because at each meeting ASIC can answer questions about their policy, consultation papers and things like that. That is very helpful for practitioners. ASIC can also hear criticism of things we do not like. That is something that the committee in Melbourne has very much appreciated and I think ASIC is to be commended for that because it is very useful, I think for both sides, in terms of identifying issues that are arising and addressing them quickly.

CHAIR: Thank you, Mr Dyer. Mr Keeves, you took some trouble at the outset to make some comments about essentially ASIC's charter in terms of disclosure as a means of regulation. You put it in the context that perhaps there was a misunderstanding at community level as to its role and the way it should pursue its business. Would you care to add any further commentary on the issue of disclosure? We have had an enormous number of submissions from members of the public who have suffered severe financial harm, I suppose, through malfeasance and bad advice over the years. They legitimately come to elected representatives such as us seeking some form of redress and to date that probably has not been as satisfactory as they would have liked. But you made a point about disclosure. Could you develop that?

Mr Keeves : There are probably a couple of aspects from which can be developed. The first one is that investment decisions are very hard. They are difficult decisions and in order to make good investment decisions one needs information but also a methodology and a framework. It is a very difficult thing for people to do. A lot of regulation in this country and around the world assumes for the most part that giving people more information will help them make better investment decisions and that is a way in which regulation can be improved. There are many different views about this and I do not think there is a representative view amongst our members on the corporations committee, but I think in some quarters there are some doubts as to whether disclosure regulation is really a panacea and that there are some indications that some of the theoretical underpinning of disclosure based regulation, which is sometimes referred to as the efficient markets hypothesis, has been perhaps by recent events called into question. I would certainly say that in liquid markets, large financial markets which are liquid, an approach to regulation that is centred on disclosure that assumes that there are sophisticated investors that are able to set prices is a very good means of regulation. But that theory cannot necessarily be applied to all financial products in all situations because it is not necessarily the case that investors are in a position to make use of all the information that is put before them. That may lead to a thought that there should be consideration of more merit-based regulation of investments. That is a radical idea for this country and would be a substantial change. But underpinning that idea is the fact that investors in effect need to be protected in a more significant way than just by disclosure.

CHAIR: If I cut through the best part of the 200 submissions we received going back to Storm and up to more recent events, say, involving Commonwealth Financial Planning Ltd, and everything in between, including all the publicity, inquiries, parliamentary committees, recommendations to government, oversight by ASIC—the list is as long as my arm—essentially those people complain, firstly, that sufficient heed was not paid to their complaints very early on. Secondly, they complain that there was a terrible degree of malfeasance and it evolved into actual fraud. Thirdly, they complain that when they alerted the powers that be to what they considered to be malfeasance and fraud it fell upon deaf ears.

Some of those people have lost a half million dollars or more, their homes and all of those sorts of things. I could probably tell them about the efficient-market hypothesis, full information and full disclosure and all of the stuff we learnt at various universities over the years, but their answer would be, 'Thank you very much, but what about my half a million dollars?' Do you have any concrete suggestions as to those issues of early-warning signals, early involvement of professional people at your level who would pick up gossip in the market, early notice to the regulator and early action by regulators to stop incidental malfeasance becoming systemic and ingrained at one level of the finance community involving hundreds of millions of dollars of losses?

Mr Keeves : I wish I could give you a simple solution to that problem. Let me be absolutely clear: we understand and are certainly not dismissive of those issues in relation to the individuals who have been affected. I think the key point—and I am not trying to explain or defend—is that ASIC necessarily has to act on information, and before it can act and exercise its powers it must have a sufficient degree of reliable information in order to act. One of the difficulties we perceive is that in those early stages it is very difficult from ASIC's point of view to get a sufficient level of information from which they can make a decision to undertake particular enforcement action. I understand that—

CHAIR: I hear your response and I do understand what you are saying. Is there an argument for some sort of early investigation or preliminary warning system to show cause? Back in Perth I had dealings with corporate lawyers from time to time and, in a lot of the stuff that emerged in some of these financial scandals over the years, the detail of it was not known at a senior level but the gossip was around in the industry. People do have a lot of information that gets circulated across Australia, but it did not bubble up through the system to such an extent that ASIC or other people were moved to demand early behaviour, early intervention to show cause or early access. Do you have a comment on that?

Mr Keeves : Perhaps if I can answer a different question. Making sure that ASIC is engaged with the marketplace is I think part of the solution, so that they are aware of new developments or what is going on in relation to particular sectors. So, making sure that ASIC is engaged with market participants is part of a solution, but another part would have to involve greater resources applied to early surveillance activities such as compliance visits. These things do take place, but I have to say this getting to a point where the expertise and experience of the Corporations Committee. Our members would rarely be involved with the sort of activities of say financial licensees.

CHAIR: Fair comment.

Mr Keeves : We are more engaged with the listed companies—

CHAIR: The technical application of the act.

Mr Keeves : That is right. I should add, though, there are breach reporting obligations. There are requirements in various places for compliance programs. There are certainly parts of the legislation which are designed to respond.

CHAIR: Before handing over to my colleagues, I have one final question. You said, I think, Mr Keeves, that the legislation was not in need of major reform and, by implication, by and large it is working well—perhaps some tinkering at the edges to modernise it is needed. From what perspective does the Law Council make that comment?

Mr Keeves : From the perspective of working with the legislation on a day-to-day basis. That in effect is what our members do—interact with the regulator on a day-to-day basis. We are mindful of the fact that changing laws is not always the best way to respond to a particular problem. Greater resources in enforcement of existing laws may be a better first step than changing a law, particularly because changes to the law always involve transitional costs, always involve compliance costs and by and large increase uncertainty. It is very important from a rule-of-law perspective, from an economic-certainty perspective, that regulation is understandable and as certain as it can be—otherwise there is the unfairness of subjecting people to a regime of law that they do not understand or know what it means. From an economic point of view, uncertain regulation does impose costs. We are also mindful—and this is based on experience of many decades—that changes that have been made to the Corporations Act have imposed considerable cost and considerable complexity. Chapter 7 of the Corporations Act, which is the primary source of regulation for financial products, is very complex, very detailed and relies on regulations in effect to amend it—class orders that are issued by ASIC to correct or supplement. It is very long. If you add up all the legislation, regulations and class orders, it is an enormous volume of material which is frankly very difficult for anyone to comprehend.

Chapter 6 of the Corporations Act, when it was passed, had a number of anomalies in it, and its current operations relies upon a series of class orders, exemptions and modifications issued by ASIC. These are things which in our view ought to be fixed. Likewise, there is a series of liability provisions in relation to disclosure for financial products—prospectuses, PDSs, takeover documents and scheme of arrangements related documents—that are different across the Corporations Act. They are inconsistent and, in some cases, they are unclear in their meaning. These are problems that could be looked at. By and large, the Corporations Act—our members would say—works pretty well.

Mr Dyer : I think it is fair to say that this submission is not really directed at the Storm saga and its aftermath. The terms of your inquiry are very broadly drafted, and I think our submission responds to those broad terms. Certainly my area of practice is quite different—I do not practice in that area, and I am not sure that John practices a great deal. In fact, I think many of our committee members would not necessarily practice extensively in the areas that might be most relevant to certain issues that have produced a lot of submissions to you. One of the reasons why I personally became involved in this submission was in recognition that the terms of the inquiry are very broad and that it is important for the committee to understand the huge range of ASIC's responsibilities and not to make conclusions about ASIC in general which might be based on particular transactions or one particular narrow area of ASIC's responsibilities where those conclusions do not necessarily apply to other areas.

CHAIR: You make a valid point that is starting to emerge, and we will certainly consider that. I get that argument, Mr Dyer. Senator Williams has an interest in this particular topic.

Senator WILLIAMS: This inquiry was probably brought on by a few of us being a little frustrated with the pace that ASIC moves on issues. I will give the example of Ricky Gillespie, the financial planner with Commonwealth Financial Planning. In June 2009, the Commonwealth Bank sent his file to ASIC. He was scrubbed out for life for forgery and fraud and other issues but he was not scrubbed out until November 2012, almost three and a half years later. I think that is far too long. Would you agree that that is far too long a period before they took that person out of the industry?

Mr Keeves : I think it is probably not appropriate for us to respond in relation to specific situations without knowing the precise details of that particular case.

Senator WILLIAMS: Fair enough; that is fine. We are very limited in time. If ASIC get concrete information in front of them, such as financial planners doing the wrong thing, would your organisation be offended if regulations were brought in where ASIC had the power to suspend a license immediately with a phone call? For example, if liquidators were licensed—we went through the Stuart Ariff campaign of four years of complaints before they acted on him while he destroyed people's lives. Then that person would have the right to go to the AAT to have their license reinstated. Would you be offended if we gave ASIC powers so that they could put suspensions on like that?

Mr Keeves : I do not think I can speak on behalf of the Corporations Committee on that point, because that is not something that our members have had the opportunity to consider. Can I just add that those sorts of regulatory or policy decisions about where to set the power of a regulator to suspend involve difficult judgements, and when you are dealing on the one hand with people's assets and livelihood and on the other hand with someone's means to make a living there are issues in relation to natural justice, and there are some—

Senator WILLIAMS: Hence the appeal.

Mr Keeves : I accept that, but there are difficult balancing acts to balance those competing priorities. In different situations—liquidators, auditors, financial license holders—the settings have been put in different places.

Senator WILLIAMS: I think both liquidators and financial planners need to have those powers, because this is going to go on for years to come. Mr Dyer, would you like to add something?

Mr Dyer : I was just going to say that I think a general point we have made in our submission bears out the committee's experience. Our sense is that the problem ASIC has is complexity of legislation, huge areas of responsibility and resources that are too limited. It is not a lack of powers, it is a lack of resources, really, and the practical ability to make things happen.

Senator WILLIAMS: I asked Mr D'Aloisio several times at Senate estimates over the years, 'Are you resourced well enough?' and the answer was 'Yes'. When I ask Mr Medcraft these days, it is, 'We could do with more.' How do you say resources are enough? We have had years of them saying that they are resourced well enough. I just get frustrated when hardworking people lose their hard-earned money because of a rogue. The time delay between taking that rogue out of the industry and how much damage that rogue has done to people's lives is what frustrates me. I want to take your point—

Senator BUSHBY: Just before you go on—

Senator WILLIAMS: Certainly.

Senator BUSHBY: I think what Senator Williams is sort of suggesting is that there are some circumstances where ASIC can see that there is potential for significant damage to be suffered by people if no action is taken, but the wheels are very slow to get to a point where it can do something. So, in a sense, we are talking about an interim injunction or something equivalent whereby they are temporarily suspended in those rare occurrences—

Senator WILLIAMS: Very rare—

Senator BUSHBY: and this would avoid further damage being inflicted on individuals who are blindly wandering along, enjoying advice from somebody who has got other than the best of intentions in mind. Could some process be set up—as you are aware, there are legal processes—even if it involved having to make a case of some sort to a judicial or quasi-judicial officer? Can you see a way forward where, if there is a risk of imminent damage, there would be an opportunity to unilaterally seek an action to suspend those licences?

Mr Keeves : Unfortunately, I did not bring my Corporations Act with me. But I am reasonably sure that a power to suspend financial services licences currently exists. I could not tell you off the top of my head what the circumstances are in which that can be exercised. I believe there is such a power to suspend in certain circumstances.

Senator WILLIAMS: We will certainly check it out.

Mr Keeves : Now, exactly what those circumstances are, off the top of my head, I am not sure. This is not an area in which I operate on a day-to-day basis. Certainly, as a matter of principle, if there were a clear and present danger, the balance of convenience, as it were, would mean, I would suggest, that action ought to be taken in order to preserve the situation whilst investigations could be undertaken. I can see in certain circumstances that that would be appropriate. Indeed, such a power would probably exist already by involving the court. You mentioned interim injunction. I think powers would exist in order to do that. It would just be a matter of—

Senator WILLIAMS: Did you say 'go to court'?

Mr Keeves : Yes.

Senator BUSHBY: I was suggesting a different alternative there. We will talk about the interim injunction later.

Senator WILLIAMS: One final question: you would have followed the DJs inquiry into Mr Mason, the chairman, approving two non-executive directors, Mr Clapham and Mr Vamos, buying 32½ thousand shares in DJs a few days before some better than expected figures were released?

Mr Keeves : Yes.

Senator WILLIAMS: Do you think ASIC handled that well? Should they have done an event study, as the chair asked them yesterday?

Mr Keeves : I think I need to repeat or paraphrase my previous answer: without knowing the precise details of the case, it is inappropriate for me to comment; and, even so, it is still a matter that is current.

CHAIR: Before I go to Senator Bushby, could I ask you to take on notice and raise with your committee the issue that has been quite prominent in these discussions. We would like the Law Council's views on some form of early intervention mechanism where there is more than a fear that a clear and present danger of malfeasance or fraud is occurring and what appropriate response and appropriate protections should ASIC be armed with to prevent these scandals leaving minor areas to turn into major events. Could you relate the thrust of the discussion that the committee has had with your organisation today and perhaps ask it to give us a written submission on notice that addresses those concerns. The committee is going to be meeting for some time yet. Although I have not caucused my colleagues, I suspect all of us would be very interested in your considered response in due course.

Mr Keeves : We would be very pleased to prepare a written submission on that point.

CHAIR: Thank you. Senator Bushby.

Senator BUSHBY: In your submission you discuss some rule of law concerns that you have. You note that it follows that making successful prosecutions or other enforcement proceedings easier by removing fundamental rule of law protections from citizens is not the best answer to perceived regulatory problems. In a broader sense you also say that, while amending legislation might be the lever that is more easily pulled by the government of the day, it is not always the best measure to respond to regulatory problems. Clearly from time to time issues arise that are within ASIC's per view. I think what you are suggesting there is that either the government or ASIC respond to that broad-brush regulatory approach rather than a more surgical examination of the issue and how it should be approached. How should the government and/or ASIC deal with these issues when they arise to ensure that you do not end up punishing the majority for the sins of the few?

Mr Keeves : That is a very difficult question—and I am not sure I have got time to answer it! One of the first points is that, if there is a perceived regulatory problem or a failing or an event, it is important to first examine whether it is an isolated event or a systemic problem and, statistically, how big a problem it is? If you impose a rule of general application across the marketplace, across Australia, you have got to work out whether we need to regulate everybody in that way in order to deal with a few isolated occurrences. There will always be fraud. You can have as many rules and regulations as you like—

Senator BUSHBY: If you set the speed limit at 100 kilometres per hour, there will still be people who go faster.

Mr Keeves : If we look at the history of finance, or even the development of financial markets, these things have happened from time to time for centuries, if not millennia. That does not mean we are saying, 'Don't worry about it,' but I think we need to be very careful about coming up with broad-brush solutions to particular problems. In many cases we would say that the enforcement of existing regulations, rather than introducing new regulations, is probably the answer, and there is probably enough in the regulatory tool kit to deal with most things. A concern expressed in relation to specific examples is the time it has taken for action to be concluded. That is a broader issue in terms of the resourcing of the court system and the way the court system tends to operate. Regulatory litigation, like any other litigation, is complex, uncertain and a very difficult thing to embark on. But I do not think that, as a result, we would advocate changing the rules to make it easier to prosecute people. We have been through that process where a number of criminal provisions have been turned into civil penalty provisions. At the end of the day—and my colleague might be better placed to respond to this—it has changed the system but I do not think it has been a silver bullet solution.

Senator BUSHBY: You have noted that the courts have been applying the so-called Briginshaw doctrine because of the severity of the consequences.

Mr Keeves : That is right. Our members are concerned about things like reversing the onus of proof and imposing strict liability. It tends to undercut the legitimacy of the regulatory regime if the way to achieve a regulatory outcome is to, in effect, make everybody guilty until they can prove themselves innocent. I do not want to take things too far but the idea that there must be a certain and known rule applied by an impartial tribunal before a citizen is relieved of their liberty or property is very fundamental. Turning that around and saying we are going to deem you guilty until you can prove yourself innocent is fundamentally inconsistent with the very important values that underpin our democracy. So these are things that we and the committee hold very dear.

Mr Dyer : Senator, if I can just add to that, I think your very good question is very hard to answer. It is made much more difficult by the breadth of ASIC's responsibilities, as we said before. I know a lot about what ASIC does in one area, which might be less than 10 per cent of their responsibilities on any fair assessment, and I do not know much about the rest of it. I can perhaps give you answers in my area, which is probably not your real concern.

Senator BUSHBY: I heard Senator Dastyari say that you could write a PhD thesis on that question, which you could. But in the end my observation is that often people who are working at the coalface see examples of how a regulator will come in and apply a broad-brush rule to solve a problem, and those at the coalface can say: 'Why didn't they just do this? Instead of making everybody pay for it, they could have just done this.' If there are examples in your area where you think that a broad-brush approach has been taken to something which could have been resolved with a more surgical approach, I think we would like to hear that, because that might inform us as to how to approach other things.

Mr Dyer : What I could say at a general level in relation to that issue is firstly, as I mentioned before, that I think the consultation that happens on the corporations committee with ASIC on an informal basis is very valuable and is something that, to the extent that it can be achieved in other areas of ASIC's operation, is highly desirable. That is an informal mechanism that can give ASIC insight in particular areas. I think we also mentioned in our submission the desirability of secondees from the private sector into ASIC, which again can give ASIC the insight that the market has if that can be achieved. There are resourcing constraints that make it difficult for ASIC to be able to attract secondees, but I think—

Senator BUSHBY: Secondees at what level?

Mr Dyer : Ideally you would have them at a range of levels, I think.

Senator BUSHBY: I think you would need to have them at senior level as well for the senior management of ASIC to hear as much as they should.

Mr Dyer : That is ideal.

Mr Keeves : That has happened in effect from time to time where senior people from the private sector have taken roles temporarily or permanently within ASIC. Just by way of example, I think it is very effective within the Takeovers Panel, where there is a regular process of secondments into the Takeovers Panel executive at a little bit past graduate level.

Mr Dyer : Some of them are reasonably senior, I think—senior associate level from time to time.

Mr Keeves : Certainly at the equivalent in London there are much more senior secondments and they are very valuable in having a relationship between the participants and the regulator. As a matter of philosophy, we think that ensuring that there is close engagement so that the regulator understands what is going on in the market and has access to some of the cutting edge thinking would be very valuable, but we are obviously mindful of the resource constraints. There is no free lunch.

Senator BUSHBY: Although you noted in your submission that in the US those who are seconded into the SEC are often very much sought after afterwards. So, if you could get that sort of culture going, it might be that people would be prepared to take a bit of a pay cut for a while while they are in ASIC in order to help pad out their CV for later on.

Mr Keeves : Yes, my understanding is that it is certainly part of a securities lawyer's possible career pathway to do an early year or two with the SEC to understand the inside workings, and that is just a regular thing.

Senator BUSHBY: Which has a two-way benefit.

Mr Dyer : Secondments to the Takeovers Panel, for example, do not involve the secondees taking any pay cut; they continue to get the pay they would otherwise have. I think that is the right model if you want to make that work.

Senator DASTYARI: Touching on what you said earlier about the wide breadth of the responsibilities of ASIC, I would say of the 418 submissions almost all, about 400 or so, are in the narrow space of compliance and enforcement, which is at the coalface. Business registration, while interesting, and complaints to the ombudsman were not really raised. I am interested in your opinion of penalties. Senator Whish-Wilson touched on this yesterday by making the point that in the American context there are much greater penalties and some people go to jail following corporate collapses and malfeasance at a financial advice or more senior level. Some academics compared the collapse of Enron with that of HIH. At the end of the Enron collapse scores of people went to jail for up to 30 years, whereas at the end of the HIH collapse a few people did a couple of years in jail. Firstly, what is your opinion of that example, although it is a crude one? I know every circumstance is different. Secondly, in your submission you raise concerns about the damages done to businesses by media speculation about investigations and possible prosecutions. I see where you are coming from, but the counterargument is the reputational deterrence factor for businesses can be as significant as any imposed penalty. I use the example of David Jones, because it has been covered in the media, where the volume was small so the penalties would be low, but the reputation of David Jones has suffered and in a way that is a form of penalty. Please give me your opinion on those two things.

Mr Keeves : I will respond to the second thing first. I want to make it clear that I do not wish to comment about the specific example you gave. In the general sense, yes, a company and its executives or directors can be damaged financially and in reputation by action taken by the regulator or by the circumstances that give rise to that action. It is unfair and inappropriate, I would say, for a mere allegation, which can be damaging, to be used as a regulatory tool. Until there is a finding after an appropriate inquiry and with safeguards inherent in a court process, it is inherently wrong to jump to a conclusion that something has happened and therefore there are consequences from the community. That is a matter of fairness, and you could say almost of human rights. Regulating a society on the basis of mere allegations and suspicion is not an appropriate. It is important, from a regulator's point of view, that publicity about regulatory outcomes is used appropriately, but we must be careful not to exceed that boundary.

Your question about penalties is difficult to answer. It is true that a person weighing up the risks of compliance and non-compliance would be thought to have regard for the size of the penalty. I find with the people I deal with that is not the way they think. The people we tend to be involved with, and there may well be some segmentation, are more concerned about reputational issues than the size of a penalty. By and large, the vast majority of Australians involved in financial markets and business are trying to do the right thing. I use the example of continuous disclosure by listed companies, which is a very, very difficult area. There are judgements that have to be made, and it is very difficult sometimes to be certain what the right thing to do is because you have to juggle a number of interests—the interests of the investors in having the information but also making sure that the information is clear and understandable. If I can digress slightly, there are many examples of markets overreacting to information. A share price may do something that, with the benefit of reflection about the fundamentals of the company, you think, 'Why did that happen?'

As I said, continuous disclosure is very difficult. In our experience, most people are trying to do the right thing, and the size of the penalty is not something that they would necessarily be taking into account. Far more important is the probability of enforcement. If we go back to my point about segmentation, there probably is a part of the marketplace where people are not so concerned about reputation—they are not concerned—and in that situation they may well be more inclined to take regulatory or compliance risks. Once again, those people are not making a kind of calculus of risk against return; they are probably assuming that they are not going to get caught. Therefore, once again, the size of the penalty probably does not make a difference. Clearly, larger penalties at the end of the day may make people feel a lot better about the outcome of the regulatory activities; but, from the point of view of whether people are going to make different decisions about their conduct, I am not sure.

The other point that I would make is that penalties need to be proportionate. Now, there are examples of recent regulation which I think we could point to—I cannot think of the name of the act—where just about any breach of the particular act carries the maximum possible penalty. That may encourage compliance with all the provisions of the act but, really, the size of the penalty needs to be proportionate to the wrong involved. Sure, you might increase compliance with filing documents with ASIC by having huge penalties, but would that be the right thing to do? Having said that, the issue of penalties and how big penalties ought to be is, once again, a very difficult question. I think it is also related to an issue that is taxing people's minds in other contexts, about mandatory penalties and the discretion that ought to be given to a court to take into account all the circumstances of the case.

One final point—and my colleague may wish to add something as well—is that there are examples where the mere finding of a contravention is sufficient. There is a particular example I am thinking of, but I will not use it, where there was no penalty imposed on a number of directors. There was a finding that a contravention occurred. From a regulatory point of view, that was enough to deal with that particular circumstance, and the outcome from ASIC's regulatory point of view was that that was very satisfactory. There was no penalty at all, but the finding that there was a contravention was enough in that situation.

Senator DASTYARI: Because of the reputational and business damage? I am not sure why you say that—just because of the impact that would have on their future board careers?

Mr Keeves : Potentially, that is right.

Senator DASTYARI: If you are saying that the outcome being reputational, future board prospect damage, was enough, that is fine; but how do you quantify that?

Mr Keeves : I am not sure it is possible to quantify it. Obviously, I do not wish to talk about specific examples. But, yes, some might say that the reputational damage was a sufficient cost. I would argue that a regulator ought not be seeking to inflict reputational damage as a regulatory outcome. That ought to be just a consequence of what might flow rather than an objective. But, I think, leaving that aside, the mere fact that in that circumstance there was a finding by a court that there was a contravention of the particular law put ASIC in a position where they were able to publicise that fact. In the example that I am thinking about the finding of the contravention was very well understood by the broader business community and by other people in similar situations, and probably led in some cases to a change in behaviour. That was probably the best outcome, that there was a change in the way people approached things as a result of the finding, leaving aside whether or not there was a penalty imposed.

Senator BUSHBY: Presumably that was the presiding judge's decision to set the penalty and basically accept the reputational damage as the effective penalty, after having considered the severity of the crime, its impact, the degree of remorse, all other mitigating factors, and whether they pleaded guilty or not. It ended up at the point, after having considered that whole range of factors, and was decided that this was the appropriate level of punishment for these people—that is, no fine, no prison term—but they would wear the consequences of the public admonishment.

Mr Keeves : Correct. In the particular case that I am thinking of there were certain person involved in the conduct who did have disqualification orders and penalties imposed. There was another category of people involved where there was merely a fine of a contravention.

CHAIR: Mr Dyer, do you have anything to add?

Mr Dyer : As has been said in relation to listed companies and directors, at least the larger or substantial listed companies, I think that reputational damage is the real penalty. In most cases that will far exceed any increasing penalties you might contemplate. The difficulty with that is that that penalty, if you like, is imposed when the decision to take action becomes public. So it is imposed before there has been any process to ensure procedural fairness. That is one of the difficulties in this are, I think, and that can be quite unfair in some cases.

Senator BUSHBY: Particularly if they are vindicated.

Mr Dyer : Yes.

CHAIR: I think that brings our sessions to a conclusion. I thank you very much, Mr Keeves and Mr Dyer, for your attendance and your assistance and for engaging in dialogue with the committee. We look forward to your further submission if your committee so chooses.