How Financial Services Firms Can Act to Meet Community Expectations Through Transparency and Accountability

Peter Kell, ASIC Deputy Chairman
Peter Kell, ASIC Deputy Chairman

A speech by Peter Kell, Deputy Chair, Australian Securities and Investments Commission at the ASIC Regulatory Update, Pritchitt Partners, Melbourne, 17 July 2018. 


Thank you for the opportunity to speak here today.

I want to cover three related topics:

  1. The current environment for financial services. We have a significant trust deficit, which has led to major reviews including the Royal Commission. What does this mean for standards for conduct and regulation?
  2. The importance of the proposed reforms to ASIC’s regulatory toolkit to help improve outcomes.
  3. Why more transparency and public data about financial services will help raise standards and accountability.

I should mention that as of this week, I am not the only Deputy Chair at ASIC. ASIC now has a second Deputy Chair, Daniel Crennan QC, who started in the role this week. We welcome Daniel’s appointment and I am sure that many of you here today will meet Daniel in the near future.

The current environment and the trust deficit

The financial services industry ultimately exists to serve the community – it exists to manage other people’s money.

Consumers and businesses need to save, make payments, manage financial risks and plan for their financial future. Providing products and services that meet these needs is the broad role of finance.

But we have seen too often that financial services firms have acted other than to serve the ultimate purposes of the financial system, and put their own interests first to the detriment of customers and the public. As a result, the financial services industry is suffering a significant trust deficit in the eyes of the community.

This much was already clear from the wide-range of reviews that have occurred in recent years, as well as media and community concerns. With the Royal Commission, that scrutiny has now significantly increased.

The Royal Commission is doing very important work in highlighting the costs and consequences of financial services misconduct.  They have covered case studies of some very poor conduct, with clear and devastating costs to customers.

Many instances of misconduct before the Commission so far have been the subject of ASIC investigations and/or regulatory outcomes. The importance of addressing these matters has been underlined by the Commission’s hearings.

The Royal Commission is bringing welcome additional transparency to the problems of misconduct in the financial services sector, including consideration of the potential origins of this misconduct. For example, the significance of conflicts of interest in remuneration has been highlighted before the Royal Commission.

The Royal Commission is also highlighting the importance of community expectations and community standards. At ASIC we have seen that an approach from financial services firms based on minimal or technical compliance with the law has, at times, been allowed to override fairness and good customer outcomes. This can only undermine trust. Examples include poor claims decisions in life insurance, or the treatment of some small business borrowers. The message for the industry is that you need to ensure that your conduct, and your products, explicitly take into account issues around community expectations and fairness.

The community expects that the services you provide are beneficial, have value and are focused on good outcomes. And they expect that this will be more than just marketing hype.

So what changes to the operations of financial sector firms, as well as regulation, will help improve standards right across financial services sector? The Royal Commission has yet to report, and I don’t want to speculate on its findings. Nonetheless, the Commission, as well as the other reviews that have looked at this sector, raise important questions directly to the financial services industry – if the lid was lifted on your business, would the process of transparency and accountability be a positive one?

ASIC, and other regulators, do not have the capacity to examine every transaction in every sector, and this is not the expectation nor is it desirable for an efficient system. What our regulatory regime does expect is that fims will be the first line of accountability for ensuring that your systems, your culture, your practices, the design of your products demonstrate that you have as a paramount concern the best interests of your customers.

Regulatory reforms

There is also an important role for regulators in raising standards. This must involve the full set of regulatory tools, including enforcement. In the financial year that has just ended, ASIC’s enforcement outcomes included 21 criminal convictions, 27 civil proceedings completed, and 27 court enforceable undertakings. We obtained almost $350m for consumers in compensation. We banned 127 financial advisers or credit providers, and disqualified 49 directors. In other words, enforcement is very much a focus for ASIC.

But what has also been clear is that ASIC’s powers and penalties have needed an upgrade, which was a point we made in clear terms to the Financial System Inquiry.

ASIC is therefore pleased by the recent joint announcement from the Treasurer and Minister for Revenue and Financial Services that the Government will significantly upgrade ASIC’s penalties and powers, following the recommendations of the Enforcement Review Taskforce. As this announcement noted, some of the penalties have not been increased for more than 20 years.

These reforms include:

  • significantly stronger and clearer rules about the obligation of licensees to report breaches to ASIC honestly and in a timely manner.
  • a stronger ability for ASIC to take regulatory action against senior managers or controllers of financial services businesses.
  • a ‘directions power’, that will enable ASIC to direct licensees to take particular remedial actions such as consumer compensation programs.
  • stronger penalties for licensees. For example, a breach of section 912A, the ‘efficiently, honestly and fairly’ obligation for licensees currently does not incur a penalty, but would under proposed reforms.

There are several other areas of regulatory reform which will play an important part in addressing the ‘trust deficit’, and improving standards in the financial services sector.

Thse are financial product design and distribution obligations and the introduction of product intervention powers for ASIC.

The design and distribution obligations will apply to issuers or distributors, and would be imposed at the stage of product design and distribution, and after the sale of the product. This last point is important. What we have seen again and again in this sector is that the upfront offer to the customer is simply not matched by post-sales experience. The charging of ongoing fees without providing a service in the financial advice sector is but one example. I’m going to talk about this point – the divergence between the promise and the perforrmance, in more detail in a moment.

These obligations will bring accountability to issuers and distributors of products by requiring them to establish processes and controls for ensuring products are designed with customer needs and understanding in mind, and are marketed to the section of the population for whom they are useful and appropriate.

There will no longer be the opportunity for ‘product manufacturers’ to shift blame to ‘product sellers’ and vice versa when something goes wrong, which has been an unfortunate feature of the financial services industry for too long. The reform signals that responsibility for good consumer outcomes runs right across the supply chain.

As a complement to these obligations, the Government has also consulted on a product intervention power for ASIC, that would enable us to intervene where a product is identified as creating a risk of significant consumer detriment.

The Government is still considering the scope of this power but ideally, this will be a broad flexible power that will enable ASIC to intervene in relation to all products within our jurisdiction, with a range of interventions including where features such as the remuneration structures raise the risk of significant harm.

With a flexible power ASIC would be able to take the most effective approach possible in the circumstances to achieve the right market outcomes.

We encourage industry to start thinking now about whether your product design and distribution is meeting these obligations, and capable of producing good consumer outcomes.

Recurrent data collection

The third area I wanted to discuss today is around greater transparency and providing more public data about actual customer outcomes in financial services.

This has arguably received less attention than discussions of powers and penalties, but I believe it has the potential to be a game changer, and is already helping to improve outcomes in parts of the industry. After all, one of the key sources of community and consumer frustration with the financial services sector is the divergence between what is promised and what is delivered over time. If we can improve transparency around outcomes, this will help with accountability and trust.

Importantly, this is not an argument for more ‘traditional’ disclosure. There has been too much reliance on individual disclosure at the point of sale as the answer to a whole host of market problems and failures. Indvidual disclosure is typically provided in such a way that comparisons can be difficult. Too much of this disclosure has been about the ‘promise’ without sufficient information being available about actual outcomes. This has clearly not worked in many areas, or at least not been sufficient on its own. Disclosure of conflicts of interest on this basis, for example, has not driven better conduct.

Rather, we need more readily available, industry-wide data on how products and services have actually performed, not just what they promise! This is not just investment returns, but issues such as how complaints are dealt with.

Importantly, this should be recurrent data, rather than one-off, so that we can all see trends over time. This will, in ASIC’s view, help not only the regulator, but industry participants, consumers and other stakeholders.

As a result, ASIC has been developing its use of data analytics to improve its ability to identify, analyse and respond to risks, and to achieve better consumer outcomes.

This work is supported by funding announced by Government in April 2016 to increase ASIC’s data analytics and surveillance capabilities. More granular financial services data on a recurrent basis will help ASIC to:

  • better understand the markets we regulate
  • to more effectively detect and quantify existing and emerging risks
  • to identify sub-sectors for deeper supervisory focus, and
  • to drive better consumer outcomes in part by providing data publicly.

Let me give some examples from the insurance space:

  • There has not been readily available public data on life insurance claims outcomes. Yet for consumers this is a key measure of the performance of their insurance product. What percentage of claims are paid or denied? How does that vary across different product types? How does that vary across insurers? What trends are we seeing over time? ASIC and APRA have therefore embarked on a major project to deliver insurer level data on life claims outcomes.
  • ASIC’s work on the sale of add-on insurance through car dealers found that the average claims ratio (the amount paid out vs the amount collected in premiums) on most of this insurance was less than 10c in the dollar. Prior to our report on this issue, there had been no hard data to demonstrate how poor most of these products were. The report has resulted in major industry change, and we intend to ensure that regular updates are provided.

There are other examples.

  • Until the Financial Advisers Register being established it was impossible to see the full picture of the advice industry, adviser qualifications, and how  advisers are moving around the industry.
  • The recent announcement by the Government as part of the dispute resolution reforms that internal dispute resolution data will be collected from all licensees and published by ASIC. This will shine an important spotlight on the treatment of customers.
  • ASIC has announced that we will be looking to ensure greater transparency around approved product lists for wealth management firms – not only what is on the APL (internal and external products) but what product in practice is recommended to customers.

ASIC has undertaken some one-off data projects which have had a significant impact on industry – for example in 2016 we released a major review of mortgage broker remuneration to determine the effect of current remuneration structures on the quality of consumer outcomes. We collected 157 data points on 1.4 million home loans.

But what we are now seeking to implement is regular reporting not just one-off bespoke exercises. This program of data collection could deliver net benefits for all parties through, for example, cost-effective recurrent collection and reduced need for expensive bespoke data requests.

Ultimately a major benefit will come from greater consumer and community understanding and trust.

We acknowledge that recurrent data collection will have a cost impact on industry. ASIC will work with industry and others to manage this impact

We know that firms are laying the groundwork now for tomorrow’s data models and systems. We want to work with industry to enable higher quality and more efficient data collection over time.

However, this work is an important element in ASIC’s regulatory and supervisory approach, so some cost will be unavoidable. There is a public benefit from greater transparency.

We are also working closely with other regulators, and especially APRA to leverage their experience.

  • ASIC and APRA will coordinate their respective projects to:
    • minimise duplication of requirements and stakeholder engagement
    • ensure reasonable implementation timetables.
  • ASIC will also work with other agencies such as the Reserve Bank of Australia and third-party service providers to maximise reliance on data already reported to these bodies.

As well as the examples I’ve mentioned, two data collection pilots are proposed to commence in ASIC in 2018, relating to mortgage and managed fund flow data.

While detailed consultation will be conducted around each specific data collection project, the types of data we would be looking to collect would include, in the case of managed funds:

  • assets under management in all schemes for which a firm is the responsible entity
  • inflows and outflows of each scheme, and
  • the number of investors in each scheme, including the how many wraps/platforms or IDPSs are amongst those investors.

We will be able to then use this data in a number of ways, including identify potential trends and issues that can help us prioritise our regulatory actions and provide feedback to industry. We also envisage the release of aggregated data to help consumers and the public more broadly. 


In conclusion, I encourage you to continue to engage with how your organisation is meeting the challenges of this period of scrutiny, review and reflection. One outcome is inevitably a greater demand for details about the outcomes produced in financial services, if done well, this will help all participants – regulators, firms and customers.