Accountability of the Australian Securities and Investments Commission and the Establishment of the Financial Regulator Assessment Authority – An Evaluation 

By | July 7, 2022

The Australian Securities and Investments Commission (ASIC) is Australia’s corporate, financial services, and consumer credit regulator. A general description of ASIC is that it is responsible for corporate regulation, the regulation of financial markets and clearing and settlement facilities, the regulation of providers of financial services, and market integrity and consumer protection functions in connection with the finance sector.   

Consistent with its extensive range of responsibilities, ASIC has an extensive portfolio of powers which it describes as being “designed to protect consumers against misconduct and harms relating to financial products and services.” These include the powers to register financial services providers, maintain publicly accessible registers, grant Australian financial services and credit licenses, intervene to ban defective products, make rules to ensure financial market integrity, investigate suspected breaches of the law, issue infringement notices, seek civil and criminal penalties through court action, and ban individual activity such as providing financial services. 

One of ASIC’s most important discretionary powers permits it to alter the application of the Corporations Act 2001 to a particular case or category of cases, effectively a discretionary power to rewrite part of the Act. ASIC has the power to exempt or modify the application to a person or corporation of provisions of Chapter 6 (takeovers) of the Corporations Act, Chapter 6A (compulsory acquisition) and Chapter 6C (substantial shareholdings and tracing beneficial ownership in shares). 

ASIC’s responsibilities and powers have grown substantially over time. For example, legislation in 2019 increased both criminal and civil penalties available for financial sector and other misconduct. In the same year, ASIC gained a product intervention power that allows it to temporarily ban financial products and credit products where there is a risk of significant consumer detriment. Further, in response to recommendations in the ASIC Enforcement Review Report, ASIC has been granted greater investigative powers relating to search warrants, greater access to intercepted telecommunications information and enhanced powers to make orders banning persons from involvement in the provision of financial services. 

The considerable expansion of ASIC’s responsibilities means that it now has a substantially wider regulatory remit than comparable market conduct regulators in other countries.  

The significant powers and responsibilities of ASIC necessitate an accountability framework for the regulator. However, what has been contested is the extent and form of that accountability. A particular challenge in deciding what is an appropriate accountability framework for a regulator such as ASIC is that, like many other regulators, ASIC is a body established by statute with commissioners appointed by the government and with important public policy objectives in its statute. Yet it operates at arms-length from government. This combination of important public purposes, significant powers and operational independence from government raises for consideration the important question of how ASIC is made accountable to ensure it is properly serving the public interest and achieving the purposes for which it was established. 

ASIC is subject to a range of accountability mechanisms, but they have limits. For example, parliamentary scrutiny is typically viewed as a major accountability mechanism through which regular reviews of ASIC’s performance can be undertaken. But parliamentary scrutiny, while important, is limited, because of ASIC’s increasingly broad and complex remit and the limited time and resources available to Parliament to undertake detailed reviews of ASIC’s performance. Other accountability mechanisms which apply to ASIC include ministerial accountability, auditing, and ad hoc reviews by the Auditor-General supported by the Australian National Audit Office, review of certain decisions of ASIC by the Federal Court of Australia and the Administrative Appeals Tribunal, the application of the Freedom of Information Act 1982, and the possibility of the Commonwealth Ombudsman investigating some actions by ASIC. 

When these accountability mechanisms are examined, it becomes apparent that they have remained largely unchanged while ASIC’s responsibilities and powers have grown substantially. This makes the case for additional oversight of ASIC compelling. In addition, none of the accountability mechanisms focuses in a systematic and ongoing way on the overall performance of ASIC. 

Given ASIC’s substantial responsibilities and powers, it is not surprising that debates have occurred about the adequacy of the ways in which ASIC is accountable for the decisions it makes. For many years, the view was held by the Australian government that existing accountability mechanisms for ASIC were sufficient. However, the 2019 final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry documenting significant misconduct in the financial services industry and regulatory failings by ASIC led the government to accept the Royal Commission’s recommendation to establish an oversight body for ASIC. In 2021, legislation was enacted which established the Financial Regulator Assessment Authority (FRAA). 

The principal function of the FRAA is to prepare assessments of ASIC’s effectiveness and capability every two years and to provide a report to the Australian Treasurer, with the report to be tabled in each House of Parliament. The FRAA has a similar function in relation to the Australian Prudential Regulation Authority. 

There is no guidance in the legislation establishing the FRAA regarding how it is to assess ASIC’s effectiveness and capability. Given this lack of guidance, there are several challenges regarding reviews undertaken by the FRAA. The first challenge is to define what is meant by “effectiveness” and “capability.” The second challenge is to decide how the FRAA will go about assessing ASIC’s effectiveness and capability. What measures will be used? Any measures to assess performance must be relevant, reliable, and realistic. 

An important issue is the criteria the FRAA will use to assess the effectiveness and capability of ASIC, and the benchmarks and metrics used by the FRAA to assess how ASIC is performing against these criteria. We propose that when assessing ASIC’s performance or outcomes in particular areas, one of the questions for determination by the FRAA should be whether these outcomes were achieved in a way that is timely, efficient, consistent with previous decisions, fair and transparent. 

For example, when ASIC undertakes a consultation process prior to making a decision that will result in regulatory change, this process must be timely (not take excessive time, with the time taken depending on the importance and urgency of the matter), efficient (the resources allocated to the consultation must reflect the importance of the matter), consistent with previous decisions (inconsistent decisions by the regulator create uncertainty and increase costs for those subject to the decisions), fair (those who need to be consulted are in fact consulted, given appropriate time to provide their view, and their views are accorded appropriate weight by ASIC as part of its decision making), and transparent (the process that ASIC intends to follow should be clearly and publicly explained and submissions made to ASIC should be publicly available unless the submitter requests confidentiality). 

A related point in terms of measuring ASIC’s effectiveness is that a critical issue for regulators that have a role in setting industry standards is the quality of the processes they adopt to gather information and then analyse and evaluate that information prior to making a decision. Are these processes, including ASIC’s consultation processes with those who will be impacted by the decision, effective? One way that the FRAA could assess the effectiveness of ASIC in how it obtains and processes information is to adopt a case study approach. In other words, an area in which ASIC has made an important regulatory decision relating to industry standards could be examined in detail by the FRAA. 

The success of the FRAA is not assured. It has a series of challenges including what criteria it will use to assess the effectiveness and capability of ASIC, and what benchmarks and metrics it will use to assess how ASIC is performing against these criteria.  

Finally, the performance of the FRAA itself also needs to be assessed and monitored to ensure its accountability and effectiveness, including improving its performance over time. We suggest that some of the principal questions in reviewing the effectiveness of the FRAA should be (1) the appropriateness of the criteria, benchmarks and metrics established by the FRAA for its reviews, (2) the adequacy of the processes that it adopts for its reviews, and (3) the content and quality of the reports of the FRAA to the Australian Treasurer and Parliament and whether they provide an appropriate overall review and assessment of the effectiveness and capability of ASIC. A more challenging issue for those charged with oversight of the FRAA is identifying whether ASIC’s performance has improved and, if so, whether this is related to the work of the FRAA or other influences. 

Lloyd Freeburn is a Research Fellow at the Melbourne Law School of the University of Melbourne.  

Ian Ramsay is the Redmond Barry Distinguished Professor Emeritus at the Melbourne Law School of the University of Melbourne. 

This post is adapted from the authors’ paper “Accountability of the Australian Securities and Investments Commission and the Establishment of the Financial Regulator Assessment Authority – An Evaluation” available on SSRN.  

The views expressed in this post are those of the author and do not represent the views of the Global Financial Markets Center or Duke Law. 

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