Fact check: Can ASIC do the same job as a financial industry royal commission?

Updated

The claim

One of Labor's higher profile election policies is a promise to hold a royal commission into "misconduct in the banking and financial services industry".

On April 11, 2016, Treasurer Scott Morrison responded by saying that a royal commission is unnecessary as the Australian Securities and Investments Commission, or ASIC, can do the job.

"There is nothing that ASIC can't do that a royal commission can do. I mean, ASIC can do it all now and I think that's the clear message to those who are proposing this arrangement: ASIC can do the job right now..."

Is Mr Morrison correct? ABC Fact Check investigates.

The verdict

Mr Morrison's statement is overblown.

The scope of Labor's proposed royal commission is very wide, and will include the examination of practices that might be legal, but Labor calls "inappropriate".

Technically, both ASIC and a royal commission have similar powers to investigate misconduct in the financial services industry.

ASIC is also able to take a further step: it can impose fines, cancel licences and bring prosecutions against people and organisations that break the law.

Both ASIC and a royal commission can hold public inquiries into systemic issues, although ASIC does not do this on a regular basis.

In practice, ASIC's role does not extend to assessing its own effectiveness as a regulator, as acknowledged by the Government holding an "ASIC capability review" in 2015, the report of which was released in April 2016.

Some experts suggest that the systemic problems are well known, and "the job" to be done is a change to the law, not another inquiry.

However, if "the job" of a particular royal commission is essentially a political one — to embarrass the banks, shine a light on high salaries in the industry and get payback for Abbott government royal commissions — or to provide a high profile forum for the airing of consumer grievances, then ASIC is not set up to do it.

What is a royal commission?

The Australian Law Reform Commission says that a royal commission is an inquiry set up by a government "usually to ascertain factual circumstances and make recommendations".

Under the Commonwealth Royal Commissions Act 1902, the Governor-General commissions a person or persons to inquire into and report on any specific issue that relates to or is connected with "the peace, order, and good government of the Commonwealth, or any public purpose or any power of the Commonwealth".

Recent Australian royal commissions have been used to investigate suspected wrongdoing, but in the past they have also been set up to for experts come up with solutions to policy problems.

The ALRC notes that public enquiries such as royal commissions "fulfil an important social function by providing an opportunity for individuals to air grievances against various parties, including governments".

What powers does a royal commission have?

A key feature of royal commissions under the Act are its so-called "coercive powers", meaning:

Witnesses can be issued with a summons requiring them to give evidence or produce documents.

Search warrants can be obtained.

Non-compliance, providing false information or obstructing a witness can result in fines and imprisonment.

Royal commissions usually hold public hearings, but a commission can decide to make a hearing private and stop information being published.

According to the ALRC, a commission will consider "whether the risk that a person's reputation will be unfairly damaged outweighs the public interest in conducting a royal commission hearing openly".

Witnesses can also request that they give their evidence in private if the evidence relates "to the profits or financial position of any person" and it would be "unfairly prejudicial" to make it public.

The final product of a commission is a report. It cannot bring criminal proceedings against anyone, but it can provide information to authorities such as the police and ASIC who may continue the investigation.

In the case of Labor's proposed royal commission, a consumer who has lost money in a financial scandal may potentially have a chance to air their grievances if called as a witness, but the commission cannot order any compensation be paid to that person.

The report may also recommend changes to the law. For instance, the 2002-03 Royal Commission into HIH Insurance considered the role of the Australian Prudential Regulation Authority and made recommendations about its future structure and powers.

Who is ASIC and what can it do?

ASIC calls itself "Australia's corporate, markets and financial services regulator" and has a number of functions set out in legislation including the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001.

It has administrative functions such as licensing credit providers and maintaining a register of companies, but it also investigates and prosecutes individuals and organisations involved in misconduct in the financial services industry.

It does not need to wait for the Government to tell it to investigate: ASIC can "make such investigation as it thinks expedient" if it suspects:

there has been a breach of the Corporations Act, or a breach of any other law relating to the management of a company or

fraud concerning a company, a managed investment scheme or financial products.

The Treasurer can also direct ASIC to investigate a variety of issues including the "affairs...of a corporation", "the giving of advice, analyses or reports about financial products" and "the provision of compensation arrangements for a financial market".

When conducting its investigations, ASIC has similar powers to those of a royal commission:

It can issue a notice requiring a person to provide "all reasonable assistance" and give evidence on oath

A company's books and records can be inspected

Non-compliance, providing false information or obstructing a witness can result in fines and imprisonment.

ASIC can choose to hold hearings in public or private, except where corporations law requires a private hearing.

Mr Morrison's spokesman suggests to Fact Check that ASIC can be more flexible when it holds hearings.

"ASIC hearings...can be conducted with as little formality as possible [whereas] Royal Commissions operate formally, observing rules of evidence and allowing counsel to cross-examine witnesses".

ASIC can also release interim and final reports on particular issues, but in practice, ASIC is more likely to resolve particular issues privately, without high profile hearings or publicly released reports.

Professor John Stumbles of the University of Sydney Law School tells Fact Check:

"ASIC does look at broad policy issues, notably in its formulation of policy guidelines and practice notes in relation to the areas of financial markets and the financial services industry. "It also has the power to hold public hearings, but it is relatively rarely exercised and there is instead a focus on the investigation of specific complaints and matters. And an ASIC hearing does not usually produce a wide ranging report, but instead results in a binding decision about specific conduct that remains private."

ASIC does not inquire into its own performance. In the recent past that job has been done by the Senate (a Senate inquiry into the performance of ASIC reported in June 2014) and a "capability" inquiry commissioned by the Government (the final report of a review was released in April 2016).

What job needs to be done?

Whether or not ASIC can "do the job" depends on the job that it would be expected to do.

Labor has spoken of broad goals: Opposition financial services spokesman Jim Chalmers says the purpose of the royal commission is "to make sure that the financial institutions are treating people the right way".

On June 7, Labor Senator Penny Wong told ABC's Lateline: "The reason we called for a royal commission on the banks...is that...Australians have seen particularly over this last year a range of actions reported, activities reported, concerns reported, that really do raise doubts about some of the behaviours and cultures inside the banks."

But Labor has also used strong rhetoric, with Bill Shorten writing that it is "time to put the banks in the dock" after "scandal after scandal".

It appears that Labor's royal commission will have a very broad scope. It will investigate actual misconduct, but it will also look at behaviour that is simply "undesirable" and practices such as high pay that are unpopular with the general public .

Fact Check has looked at public statements by Labor frontbenchers to determine what exactly they want a royal commission to do. They say it will examine:

The extent of "illegal and unethical behaviour"

Business structures of financial institutions and how these affect employee behaviour

Whether the bank employees are under pressure to "cross sell things"

Whether regulators are "well equipped to identify and prevent illegal and unethical behaviour"

Whether there is "proper whistleblower legislation"

Whether there should be a "scheme of last resort compensation"

Remuneration structures of bank employees

Behaviour that is legal but "could be inappropriate, undesirable or dubious"

The "wages" of "the top end"

When Labor announced the royal commission it said it would examine "more than just banks", including superannuation funds.

In late 2015, the Heydon Royal Commission suggested information on several executives of industry super fund CBUS be referred to ASIC in relation to possible breaches of the Corporations Act.

When asked by Fact Check, Labor confirmed superannuation funds, including union-linked industry funds such as CBUS, will be covered as part of the royal commission.

Notwithstanding this, the debate as led by Labor has focused on "the big banks" and peak body Industry Super tells Fact Check that it does not oppose Labor's proposed royal commission.

What do the experts say?

Given the broad range of issues that the royal commission is intended to cover, doubt has been cast over whether either ASIC or a royal commission will be able to do the job sufficiently.

Professor Stumbles of the University of Sydney tells Fact Check that "the issue of culture and ethical standards could be investigated by either a royal commission or ASIC, however conducting a public inquiry into all of these areas would be enormously lengthy and expensive and likely to divert attention and resources away from enforcement of existing provisions by government".

There are drawbacks to both options.

"Royal commissions have a higher initial public impact but their direct results are often limited to a report. At the same time, ASIC may have difficulty holding a public hearing about the general sufficiency of the law because of the requirement for privacy for particular investigations and the fact that ASIC cannot appear to be biased as it also has to enforce the law."

Dr Bernard Mees of RMIT University tells Fact Check that ASIC may be constrained in its ability to do the job:

"Scott Morrison is right in the sense that ASIC is a statutory commission with a range of statutory powers similar to those of a royal commission. But ASIC has been underfunded for years and so has not been able to do its job properly. There is also a public accountability aspect of a royal commission that ASIC does not have."

Professor Kevin Davis of the University of Melbourne, who was a member of the Government's Financial System Inquiry panel, tells Fact Check that "ongoing analysis, regulatory oversight and consideration of legislative changes where clear deficiencies are found" is the most effective way of addressing issues in the financial services industry.

"The populist appeal of a royal commission relates, I think, more to perceptions that it will be better able to assign blame for past financial sector transgressions rather than identifying useful changes to our institutional/regulatory/legal structures for an improved financial system," he suggests.

Similarly, Dr Vicky Comino of the University of Queensland Law School says:

"A royal commission will allow people to have their point of view heard in a public forum, but it will not solve anything given we already know what the problems are. We have had the Murray inquiry into the financial system in addition to a Senate enquiry into ASIC's performance and the ASIC capability review. The issues have been well ventilated. What is needed is not another inquiry but changes to the law, including equipping ASIC with additional powers to ensure that it has the right tools to tackle corporate and financial wrongdoing more effectivel

And the industry?

The banking industry, unsurprisingly, believes ASIC is already doing the job.

A spokesman for AMP tells Fact Check that "ASIC is an effective regulator and is working constructively with the industry".

Similarly, the chief executive of the Australian Bankers' Association Steven Münchenberg says that "ASIC has extensive investigative and enforcement powers covering all aspects of customer protection and market integrity" and also points to a number of initiatives the banks announced on April 21, 2016.

"The combination of these improvements substantively addresses the issues the ALP claims are reasons for a royal commission," Mr Münchenberg tells Fact Check.

The Financial Services Council, representing the wealth and life insurance industries, points to "no less than 14 separate reviews into the superannuation, financial advice and life insurance sectors over a recent period of time" and says a "royal commission would be unnecessary and an ill-considered use of time and resources".

By contrast, the Finance Sector Union says it "will support a royal commission provided that the terms of reference for the royal commission do not allow it to become a witch hunt against individual employees" and instead it focuses on "systemic problems caused by decisions taken at the senior levels of the industry".

Sources

Topics: banking, federal-elections, scott-morrison, liberals, australia

First posted