Securities markets, participants and ASIC Paper by Tony D'Aloisio, Chairman Australian Securities & Investments Commission Securities & Derivatives Industry Association Conference Melbourne, 22 May 2008 Introduction Let me begin with a quote: “The combination of intense selling pressure, market mechanism failures, and lack of information exhausted much of the available liquidity, caused substantial uncertainty, drove down prices, and generated unprecedented volatility in all the linked markets.”1 You may think this is a description of the recent market volatility. In fact, it is the Chairman of the US Securities and Exchange Commission describing what occurred on 19 October 1987. It serves to remind us (something all of you at this Conference know all too well) that markets are cyclical. My topic today is Securities Markets, Participants and ASIC: a pretty wide topic I know, but with ASX (a body we supervise) speaking before me and the Minister for Superannuation and Corporate Law (in charge of ASIC) speaking after me, ‘flexibility’ is not a bad thing to maintain! In fact, when I was asked to speak, around October last year, a flexible topic seemed the way to go as there was considerable time to go to the Conference and the storm clouds had started to build from August 2007 (with the US subprime fall out then beginning to emerge). Not to mention that at the time, the outcome of the Federal Election was unclear and the then Opposition had not announced its corporate law reform agenda. Let me take advantage of that flexibility by covering, four topics which are not only current but are clearly relevant to you and to your industry and your business. These are: First, to update you on ASIC at the end of the first 12 months since I was appointed Chairman. Secondly, to give you my views on the regulatory issues which have arisen out of the recent market volatility or turmoil. Thirdly, to outline to you what the forward agenda is for ASIC in the next 12 months, focusing particularly on what will be relevant to you – in the context of the ASX and other market operators, the listed markets and brokers and dealers who operate in those markets. Fourthly, to outline to you possible future developments and their relevance to you, your industry and ASIC in the next two to three years. 1 Securities and Exchange Commission, Securities and Exchange Commission Recommendations Regarding the October 1987 Market Break, February 2, 1988. 2 What I hope you get out of my presentation will be the following: first, an understanding of ASIC’s priorities; secondly, how those priorities will have a direct impact on your business and your industry in the next 12 months, and possibly, in the next two to three years. My overall message is this: ASIC’s approach will continue to be measured as it was in response to the recent market volatility or turmoil. Our emphasis will continue to be to resolve issues within the existing regulatory framework and only seek legislative reform after we have pushed the existing regulatory regime to its limit. This does not, however, mean ASIC is a passive regulator or that there will not be changes. As I will explain, we will continue the process we started in May last year of increasing resources in a number of areas which will impact on you and your industry – most notably in the greater protection of retail investors, increased effort to stamp out insider trading and market manipulation and to improve disclosure. We will work with market operators, such as the ASX, and with industry associations such as the SDIA and with the industry to assist us in handling these issues. I ASIC’S achievements in the last 12 months (first of my 4 topics) The past 12 months has seen ASIC very much position itself to be a more effective regulator than in the past – to move it from, what the results of our external surveys say, as quite good to a superior performer. As happens when a new CEO joins (and the ASIC Chairman role is both CEO and Chairman, a different model to corporate models) a new set of eyes can be cast over an organisation and it provides the opportunity to push for improvements. (Some would say of course, I’ve done this before at ASX and at Mallesons so its not surprising!). It would be wrong, however, to see the last 12 months just as a period of review and planning for ASIC. It has also been a period of delivering the sorts of achievements that will see us lift our performance. Let me elaborate on that. In May last year, we outlined six priorities for ASIC - two in the Real Economy and three in the Financial Economy. The sixth was to complete a strategic review of the organisation. We are delivering each of these priorities. 3 Real Economy Priorities We perform important functions in the real economy – we manage the legal infrastructure being the corporation and licensing of key players (e.g. brokers). Our two priorities in the real economy, are to lift operational effectiveness and service levels to achieve cost reductions for all those who do business with ASIC. And we undertook to use our technology to improve existing services and introduce new services to unlock benefits for small and medium businesses. Both are about our contribution to reducing ‘red tape’. Examples of what we have done to improve service and reduce compliance costs are: (a) Our electronic lodgement capabilities to reduce paperwork and costs for Australian business. We introduced e-charges (i.e. charges over company assets) and developed a web-based software application to further streamline common transactions. Last year, 80 per cent of these e-enabled documents were lodged electronically. (b) We have made our regulatory system smoother and easier to work with regulatory documents, through measures like distilling 14 types of policy documents into five, introducing four-monthly reporting on regulatory decisions and conducting a review into the cost of regulation. We are progressing a range of other initiatives in our real economy work to make it easier to do business with ASIC and reduce compliance costs. Financial Economy Priorities In relation to the three priorities is the financial economy, our central objective has been to improve confidence in the integrity of the financial markets. The first of those priorities is helping retail investors protect their wealth. Some examples of the work in the past 12 months. ASIC has worked to restore confidence in the unlisted and unrated debenture area – the area hit by failures such as ACR, Fincorp and Westpoint. We did this through initiatives to improve disclosure for retail investors including a new disclosure regime and a new advertising guide. We also reviewed the impact of these changes on issues and reported the results to the market (through better use of our website). This work is now extending to other unlisted areas (e.g. mortgage schemes) and other managed investment schemes where (because there is no 4 secondary market) retail investors need additional assistance to assess risks. These are good examples of ASIC pushing the existing disclosure regime to the limit. We implemented a series of initiatives to improve retail investors’ understanding of investment strategies, so that they – the ones who must take the risks – could make better decisions. These included guides on investing in debentures, making superannuation decisions and living with reverse mortgages; and a report into refinancing in response to financial stress. We have taken decisive action to recover compensation for investors who lost money in recent property collapses, by using Section 50 of the ASIC Act. In other words, recognising that in some situations, the public interest will be better served by ASIC taking the compensation actions for investors. We developed a blueprint (Retail Investors Taskforce) to roll out over the next 12 months to better protect retail investors, using a special taskforce which we established for that purpose. This Taskforce was headed by our Deputy Chairman, Jeremy Cooper. In the budget, the Government has handed ASIC the important work of the Financial Literacy Foundation. Financial literacy is an important underpinning for retail investors and financial consumers. We will be looking at an extensive expansion of investor and consumer education. I know both ASX and SDIA play important roles in investor education. We see our and your work as complimentary and we look forward to working with you. Removing international barriers to capital flows The next priority in the financial economy has been our work to remove barriers to capital flows from and into Australia consistent with maintaining the integrity of our markets. This priority recognises the importance of the inflow of capital into our markets and what is now increasing, the outflow of funds into other markets. Our objective is to use our connections with other regulators to see what we can do to assist with the ‘freer flow’ of capital. Clearly important for Australia which is part of the global financial markets. We are pleased that the Government has been progressing mutual recognition with both the US and New Zealand. Our role has been to assist Treasury and the Government. Fighting market manipulation and insider trading The third priority which we announced last May in the Financial Economy was the creation of a special Taskforce (headed by our new Commissioner, Belinda Gibson) to determine what additional actions ASIC, in cooperation 5 with the ASX, could take to foster disclosure and fight market manipulation and insider trading. We have worked with the ASX to speed up the notification of referrals and to minimise the time gap between the alleged conduct and action.