Tech, Lies and Litigation – ASIC Reads the Riot Act to the Financial Services Industry

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The Australian Securities and Investments Commission (ASIC) has taken more than a few big hits over the last month, as revelations of systemic risk and misconduct within the wealth management industry were aired publicly via the Royal Commission into Misconduct in the Banking, Financial Services and Superannuation Industry. It was time for a right of reply; and this week the Chair of ASIC, Mr James Shipton deployed just that in his keynote address at the Australian Council of Superannuation Investors Annual Conference. Mr Shipton made his position very plain – the actions of the wealth management industry had not only jeopardised our entire financial regulatory system but worse, had created a ‘trust deficit’ amongst the public. It was unequivocally a “moment”.


Photo by Carlos Muza on Unsplash

By Sarah Le Breton, Compliance Quarter

A ‘trust deficit’ – does it get any worse than that? For it is ‘trust’ that underlies the foundation of all functional relationships — professional or personal, we all know that. And, once it is broken it is hard, if not impossible to restore. How then can the wealth management industry come back from this point – how do we restore trust when it has been fundamentally fractured by seemingly endless acts of self-interest and dishonesty?

We take a look at the guidance Mr Shipton proffered to the industry this week, along with the aggressive mechanisms ASIC will be deploying to ensure that the industry takes meaningful responsibility for their actions, seizes the opportunity to right their wrongs and redeem themselves, in their own eyes and in the eyes of the community. A form of financial services restorative justice, if you like.

Who is James Shipton?

Firstly, it is worth recapping on just who is James Shipton. The relatively new ASIC Chair commenced in his role on 1 February 2018, bringing with him more than 20 years of experience as a corporate lawyer, banker and regulator. ASIC has had its fair share of lawyers and bankers sitting in the top seat over the past decade, but never have they had someone who has also experienced the distinct challenges (and pressures) of regulating themselves. It was this unique blend of skills that made Shipton a favourite with the government after a long global search for a replacement to Greg Medcraft.

Mr Shipton’s regulatory experience is impressive too – the Hong Kong Securities and Futures Commission (HKSFC), a truly world-class securities regulator, where he oversaw “intermediaries” – namely, stockbrokers, corporate finance firms, high-frequency traders, investment managers, credit agencies and other financial markets specialists. I may be biased, given I too have regulated in this sector of financial services, but it doesn’t get any more complex than this – or more exciting either, it’s an area that combines technical complexity and technology with lightning-fast pace. He comes aptly equipped to tackle the broad mandate and complexity that ASIC oversees.

The ‘regulatory big guns’ will be out on display

Shipton has made it clear this week that ASIC enforcement is back – and in a big way. For those in the market who thought recent proceedings may have drained ASIC’s Enforcement Special Account too – appears not, as Shipton declared a commitment to expanding the Wealth Management Project, using this substantial funding source to further the work that has already taken place in the lead up to the Royal Commission (and in fact, has been the focus of the hearings). He also announced the recruitment of a new second Deputy Commissioner, Mr Daniel Crennan QC to strengthen ASIC’s pre-existing enforcement leadership and capabilities. The key takeaways here – the war chest is stocked and the enforcement regulatory tool kit will be pursued with vigour. I predict we will see less enforceable undertakings being used in lieu of strategic litigation strategies – administrative, civil and criminal.

Manage your conflicts

Get your house in order when it comes to the management of conflicts. A call to arms was made by the ASIC Chair for the financial services sector to undertake a wholesale review of how they manage conflicts within their business – and in doing so remember what their purpose is within our financial system – beyond making profit — and certainly when that profit comes at the expense of their customers detriment. Shipton cited Professor John Kay’s description of the four functions to assist licence holders to focus here, namely: capital allocation, inter and intragenerational transfers of wealth, hedging and insuring against risks and the payment system. His plight is clear – a call for the return of professionalism to finance coupled with purposeful leadership.

Of note, there was also a subtle cue to ASIC changing its approach to surveillance and supervision functions also. Shipton hinted to the impending use of supervision tools beyond risk-based surveillance and thematic reviews, the long-standing supervisory approach in Australia. He indicated that more focused and intensive supervisory focuses will be applied to larger financial institutions and superannuation funds – in concert with APRA. One can only speculate, in the absence of further public regulatory guidance at this stage, but presumably, the use of proactive supervision and routine examination audits as used by regulators such as the Securities and Exchange Commission (SEC), is on the horizon.

The key takeaways for licence holders here: Firstly, if you haven’t already, take steps to examine your business model and your services offerings and assess those against the guidance that ASIC has previously issued around the management of conflicts in RG181 ‘Licensing: Managing conflicts of interest’. Secondly, it’s a good time to start reviewing your compliance framework and consolidating the controls upon which it is comprised into a single source, along with your internal monitoring and surveillance records – be prepared.

Compliance technology strategy

Get RegTech ready – an enlightened call by Shipton was for the financial services sector to engage and adopt RegTech tools as a means to overcoming the significant conduct challenges facing the industry. Of note, Shipton specifically identified the potential of near real-time and augmented human judgment supervision tools, an area that we at Compliance Quarter specialise in.

The use of real-time surveillance data-driven supervision tech tools are already alive within ASIC’s financial markets division, as a result of the Flexible Advanced Surveillance Technologies (FAST) Project, which was a multi-year program of work aimed at improving the way ASIC monitored and supervised financial markets. It is technology that is also widely used by financial markets participants and exchange operators. The challenge now is for the wealth management industry to adopt similar technology use to ease the burden of manual-driven compliance processes.

Key takeaway: If you haven’t already devised a RegTech strategy for your organisation – now is the time – Shipton has made it explicit that real-time supervision – much like ASIC’s approach to financial markets supervision is what wealth management firms should be investigating and implementing.

Act with candour when ASIC comes a knocking

The final poignant message from Shipton’s address – act with candour if ASIC makes enquiries either voluntarily or by adopting their compulsory processes. He pointed specifically to instances where those who had engaged in first line compliance failures had then exacerbated the situation by not co-operating or in fact obstructing ASIC’s investigations. The key takeaway here – work with lawyers who have true skill in regulatory investigations and litigation, the commercial litigation skill set doesn’t always translate effectively in this context.

In summary, we are currently experiencing an unprecedented focus on regulatory compliance obligations in the financial services sector in Australia. It is more imperative than ever before that licence holders consider the cues provided by the Chair of ASIC in devising how they move forward from here in contributing to the closure of the ‘trust deficit’. If you would like additional support in relation to conflicts of interest management or regulatory technology strategies and solutions, please get in contact with us at Compliance Quarter. Similarly, if you are looking for regulatory investigations or regulatory litigation counsel we are also able to assist via our sister law firm, Law Quarter.

Compliance Quarter author and regulatory expert, Sarah Le Breton, will be hosting a webinar looking at director duties and responsibilities – a pressing topic for all Australian company directors but especially those in financial services at the moment. To join this FREE webinar please click here.

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