Industry ‘on notice’ over conflicts of interest: ASIC

“Ultimately, we at ASIC are here to ensure the confidence of the Australian public in the financial system, and it is fair to say that [such] confidence is in doubt, that confidence is under threat,” Mr Shipton said.

“The task before us is paramount and fundamental, and we call on the financial services sector, not to wait for any recommendation of the [financial services] royal commission, not to wait for our enforcement or intervention powers or actions, but to lean into the issues, and to highlight the inherent conflicts of interest that exist right now in finance and deal with them.”

Mr Shipton noted that ASIC is prepared to fully utilise new powers endowed to it by the federal government under the Corporations Act, designed to increase civil and criminal penalties for breaches of legal obligations.

“Importantly — and this is an opportunity for me to highlight this because I know leaders in the financial sector are listening — we will use every inch of [ASIC’s] new powers to ensure that we are aiming for a fair, efficient, and strong financial system, and we want to put these financial leaders on notice,” Mr Shipton continued.

“They need to identify [imbalances], identify their failings, and redress them because that is the way that we can get to the point where we have increased confidence and trust in the community for what is a fundamentally important function.

“Our whole economy, our whole society, relies on the proper functioning of that financial system, and that’s why it is so important that we have these powers.

“That’s why it’s so important that the financial sector moves quickly to start rebuilding trust.”

The new ASIC chairman, who assumed the role in February, added that he believes the industry missed an opportunity to learn from the failures of foreign financial institutions.

Mr Shipton claimed that there was a “lost opportunity” for the financial sector to learn from the mistakes made in foreign economies.

“The whole financial system moved to recognise inherent conflicts of interest — non-financial risks as well as financial risks — and to deal with them, to remediate them, and to put into place structures and responses within the system itself that would enable an industry prompted response,” he said. 

“We are calling on the industry to embark upon that endeavour immediately, right now, in Australia, [to] identify and do a wholesale review of where conflicts of interest exist inside institutions and the system more broadly, and to do deal with them, remediate them, and to mitigate them.

“That is an urgent call to action, and that is desperately needed by the system for it to regain the trust and confidence of the Australian public.”

Mr Shipton also called for “greater levels of professionalism” in the financial services sector, and was critical of a perceived revenue-focused, profit-driven culture in the industry.

“They need to be proud in the execution of a very valuable purpose that finance serves for the community and for society. That purpose has been lost,” the ASIC boss added.

“That purpose has been lost in my mind, because there’s been a focus on revenue targets and profitability as opposed to serving communities, societies and the broader economy.”

ASIC on increased disclosure in the broking industry

During the course of the committee hearing, ASIC’s senior executive leader and regional commission Michael Saadat also responded to questions from Labor MP Matthew Thistlethwaite about the regulator’s view on potential changes to disclosure requirements in the broking industry.

Mr Thistlethwaite asked: “Is it an obligation for a mortgage broker to disclose verbally to a client that they’re receiving an upfront commission and a trailing commission from the lender.”

In response, Mr Saadat said: “No there is not — the obligation to disclose the commission arises once the credit contract has been provided to the customer, so the home loan documentation will contain information about the commissions that are paid to the broker by the lender.”

The Labor MP added: “A lot of people don’t read those documents, you’d be well aware of that unfortunately. Do you think it should be a requirement that verbally, when you sit down with one of these brokers that they disclose verbally that they’re getting a commission from the lender and that may include a trailing commission or keeping them in that product?”

Mr Saadat replied: “We do think that there’s a role for better disclosure around commissions. But also, a number of other things that we’ve highlighted in our report on broking, suggest that it's not just the commissions that play a role here, we think it’s important for consumers to know which lenders a broker is actively recommending.

“There’s often a suggestion that brokers have a choice of 20 or 30 lenders to recommend, but what we found that in practice, they will typically recommend around four lenders to their customers.

“We think disclosure of that is important.”

Mr Saadat also reiterated ASIC’s view of the need for increased disclosure from brokers operating under lender-owned aggregators.

“We also think disclosures  of ownership structures is important to customers, because there are several large mortgage broking businesses that are owned by banks, and we think disclosure oi that information is also important,” he added.  

However, the ASIC commissioner noted that he believes increased disclosure does not always lead to “good consumer outcomes”.

“At the same time, I think disclosure has its limitations. We’ve seen in other contexts that disclosure doesn’t really assist consumers to make good decisions.

“I think in some situations, disclosing your conflict of interest actually results in the consumer having more confidence in you because you’re seen to be trustworthy.

“Disclosure is important but on its own isn’t going to be enough to make sure that there are good consumer outcomes, which is why we’ve made a range of recommendations about how we can improve the remunerations of brokers and consumer outcomes.”

When asked if the broking industry should adopt a FOFA-style “best-interest duty”, Mr Saadat said: “That is a matter for the government to decide, but we have publicly said that the standard that currently exists for brokers, which is that they need to provide a service, which ensures that the loan is ‘not unsuitable’, that there’s scope for raising that standard.

“Whether that should be a best interest standard, I think is something that is worth considering, but we don’t have a firm view about whether best interest is the right standard or whether a more tailored obligation should apply to brokers, given that they are recommending different types of products to financial advisers.”

Further, Mr Saadat was asked about the payment of volume-based and bonus commissions.

Mr Saadat told the committee: “We came out pretty strongly and said that the industry should move away from those types of commissions because they do exacerbate the conflicts  of interest that exists.

“The industry has accepted that recommendation and they are now moving towards the removal of volume-based commissions and bonus commissions.”

[Related: 10 years of jail for most serious Corporations Act breaches]