11 March 1996 - 3 December 2007
ASIC SUMMER SCHOOL
‘REGULATING FOR GROWTH:
THE RISKS AND CHALLENGES’
5 MARCH 2007
Good morning. I’m delighted to give the opening address to this year’s ASIC Summer School. Past Summer Schools have been very valuable and I’m sure that this year will be no exception.
I congratulate Jeff Lucy, Jeremy Cooper and Tony D’Aloisio for this great initiative and for their kind invitation to address you today.
Firstly, I’d like to talk about ASIC’s performance in recent years.
Under Jeff Lucy’s leadership, ASIC continues to support Australian businesses and investors. ASIC works with an ever-increasing number of corporations, company auditors, registered liquidators, financial markets, financial services businesses and managed investment schemes. The entire community benefits from the environment that ASIC promotes — an environment of efficient corporations and informed capital markets.
ASIC’s Enforcement Record
ASIC’s enforcement record is a great testament to the assiduous work of ASIC in protecting mum and dad investors from corporate crooks and they have a record of which they can be proud.
In the 5 years from 2000/01 to 2004/05, due to ASIC’s enforcement actions:
- 128 criminals were gaoled for terms totalling over 430 years,
- 101 company officers and directors were fined or banned from managing companies,
- 186 people were banned from offering financial services,
- 58 company auditors and liquidators were disciplined for misconduct,
- ASIC obtained or assisted in over $610 million in recoveries, compensation, fines and assets frozen, and
ASIC accepted 158 court enforceable undertakings.
In the past year alone, 2005-06, ASIC’s record included:
- 27 criminals convicted including 17 gaoled;
- 44 company officers and directors banned or removed from managing companies and 27 people banned or removed from offering financial services ;
- 14 auditors and liquidators disciplined or deregistered for misconduct,
- $144 million in recoveries, costs, compensation and fines, with more than $71 million in assets frozen; and
- 195 criminal, civil and administrative proceedings against 391 people or companies commenced.
You would all be aware of some of the high profile cases – such as:
- Brad Cooper who was sentenced to eight years imprisonment in the NSW Supreme Court after being found guilty of thirteen charges related to corruptly giving a cash benefit and for publishing false or misleading statements with the intention of obtaining a financial advantage; and
- the former foreign exchange traders with the National Australia Bank who were sentenced to jail for dishonestly using their positions as employees of NAB to gain advantage for themselves and others on foreign exchange spot trades.
You would also be aware of ASIC’s ongoing investigations in relation to James Hardie, Westpoint and Project Wickenby, the multi-agency taskforce set-up in 2004 to investigate internationally promoted tax arrangements that involve tax avoidance or evasion, and in some cases large-scale money-laundering.
What you may not be aware of are the significant additional responsibilities that ASIC has taken on as a result of the implementation of the Government’s significant Corporate Law Economic Reform program.
I have supported ASIC’s role as the corporate regulator with significant funding increases over recent years so that ASIC can maintain its strong enforcement record and manage its increased responsibilities. Funding for ASIC has increased by 58 per cent above CPI, from $128.1 million in 1995-96 to a budgeted $265.2 million in 2006-07.
In last year’s Budget ASIC was given a significant funding boost of $234.6 million over four years which included an extra $120 million to ensure that ASIC is well resourced to investigate and litigate exceptional matters of significant public interest and to guard against high profile defendants avoiding prosecution by attempting to ‘price out’ the regulator.
It was well received. The Chief Executive of the Australian Shareholders Association stated that “ASIC will be on a level playing field with its defendants. Gone will be the days where well funded defendants use the high-cost policy of delay and deflection in order to get ASIC to give up due to the expense of the case.” (The Australian, Tuesday 16/05/06, p.22)
Danger for ASIC and the Economy
But it has become clear that not everyone agrees with the Government’s commitment to take a strong lead against corporate crime. On Friday 2 March the Labor Party announced a plan to rip $129.8 million out of ASIC over four years. This would amount to a 12% cut to the ASIC budget.
Such a move would detract from the sound corporate governance framework that we have built. It would put at risk the protection of mum and dad investors.
It would detract from the integrity of our corporate markets and our economy – our one trillion dollar economy.
The role that ASIC plays in our economy is too important for such an ill judged attack on its resources. In response I pledge that under a Coalition Government ASIC will always be well resourced to do its job.
Review of Corporate Sanctions
Corporate wrongdoing has the potential to impact on the efficiency and development of the economy, and has repercussions for the broader community including employees, creditors, customers and shareholders. The need to provide robust sanctions to deter and punish corporate wrongdoing and protect the integrity of the market also needs to be balanced with promoting the development of a competitive business environment.
Today I release a new discussion paper which reviews sanctions in the Corporations Act. The purpose of the review is to engage with stakeholders about areas where they see complexity and inconsistency in the current system of sanctions in corporate law.
One of the issues examined in the paper is whether the expanded use of civil sanctions in corporate law would provide additional options in deterring bad corporate behaviour.
The paper also examines whether higher penalty amounts for civil breaches would better protect consumers and reflect community expectations.
The Government is committed to ensuring that regulation strikes a balance between facilitating business efficiency and ensuring that consumers are protected. The outcome of discussions on this paper will guide the Government’s further reform in this area.
Asian Capital Markets
Despite progress in recent years, financial markets remain under-developed in many economies in our region. Markets are relatively small, liquidity is low, and issuer and investor bases are narrow. This under-development has received considerable attention in recent times because inefficient use, and poor management, of savings means that available capital is not being utilised for Asian growth and development. This in turn poses potential risks for regional and global stability.
Private capital markets, while relatively small in many Asian economies, provide a degree of diversification within financial markets. They are widely seen as enablers for further growth of private-sector firms. While bank intermediation plays an important role in the early stages of economic growth, bank-dominated financial systems tend to generate inefficiencies that can constrain development in a more sophisticated economy. So I would encourage the further development of private capital markets as alternative sources of capital.
For these reasons, it’s important that the international community continues to support efforts to strengthen the financial infrastructure and institutions that support the development of private capital markets in the Asia-Pacific region.
This includes supporting reform initiatives by individual economies to reinforce regulatory and supervisory frameworks… develop an institutional investor base… strengthen corporate governance… improve transparency and disclosure… enhance market depth and liquidity… reinforce insolvency laws… increase competitiveness… and strengthen the banking system.
Regional forums can play an important role. For example, APEC is a well-established forum for economic cooperation between the economies of the Asia-Pacific and the Americas.
One of the policy themes of this year’s APEC Finance Ministers’ meeting, hosted by Australia, will be deepening and integrating private capital markets.
One initiative being advanced as part of that policy theme is a web-based tool to help APEC economies share experiences on practical reform implementation and sequencing options. This tool could be expanded to become a collective resource on practical experience across the full spectrum of financial sector reform activity.
This is just one example of how regional forums can assist each other to develop more sophisticated private capital markets in the Asian region.
I want now to make some observations on an emerging issue which will occupy the attention of regulators over the next few years.
Private equity appears to be gaining popularity globally for many reasons, including reduced compliance costs… accessibility to the highest quality management and strategic partners… reduced agency problems… and lower transaction costs.
In Australia, private equity is a relatively small but increasing component of Australian capital markets. At the end of 2006, private equity fund raising amounted to about $22 billion, compared to $1.39 trillion for listed public equity.
While the Australian private equity market is still relatively underdeveloped — as a proportion of both GDP and mergers and acquisitions activity — we can expect that Australia will continue to receive more attention from large international private equity firms. We can also expect private equity investment in this country to continue to grow.
To the extent that private equity fund managers prudently invest in, and sustainably grow the size and profitability of, their business, there will be positive outcomes for the Australian economy.
However, private equity does present some regulatory challenges.
As a number of private equity transactions are initially highly leveraged — up to 80 per cent debt-funded — questions have been raised, particularly in the United Kingdom, about whether the growth of lending by banks to private equity investors poses a systemic risk. In the UK and US, it appears that the trend is away from bank lending as more non-bank institutional investors participate in the funds.
Last year, the UK market regulator, the Financial Services Authority, observed that competitive pressures between financial institutions to arrange debt funding for private equity bids had contributed to the reductions in yield spreads between senior and subordinated debt. This led to general market concern that the risks, at least internationally, are currently significantly under-priced.
The Financial Services Authority also observed that debt pricing is not the only element of structured financing products to come under competitive pressure, with widespread evidence that loan covenants were being weakened, made with concessions, or removed.
The FSA considered that it was advisable to monitor covenant waivers, amendments and re-financings more closely, in addition to formal default levels. Additional monitoring of credit spreads was also considered to be prudent.
I should point out that, here in Australia, the Reserve Bank already monitors trends in corporate creditworthiness indicators as part of its routine reviews of financial system stability.
The UK Financial Services Authority also noted that, increasingly, private equity owned companies are being initially financed with a capital structure that is unsustainable in the long term — for example through bridging finance, high yield bonds or mezzanine debt. An inability to re-finance on competitive terms in the future could see the company in difficulty.
This is a particular issue for Australian companies, because in many private equity arrangements, investors will be borrowing from overseas. This will make Australian companies sensitive to international economic shocks or market downturns. I’m sure we all remember that many Australian investors were burned in this type of situation during the recession of the early 1990s.
The Reserve Bank has also expressed concern that if the economic environment becomes less favourable, there could be large and potentially disruptive company balance-sheet adjustments.
As well, the complexity and lack of transparency of many private equity investment products means that, potentially, there are many financial, credit and market risks associated with these investments. These include potential conflicts of interest, and unclear ownership of economic risk.
Finding the optimal regulatory approach will require a careful balancing act. Too much regulation could be detrimental to capital market efficiency, or cause the private equity industry to move to more lightly regulated jurisdictions. And too little regulation could damage market confidence.
In Australia, the issues raised by private equity are being examined to gain a better understanding of their effect in the marketplace. The Council of Financial Regulators, which consists of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and Treasury, are preparing a report on this issue.
Let me say we see no immediate risk to the financial system in any respect. Our financial system is well capitalised and enjoying very strong profits. But we will be having a look at what may emerge if private equity grows substantially over 3, 5, or 10 years.
Ladies and gentlemen, the area of regulating for growth is complex. It requires judgement and experience. There are many rewards for getting it right, just as there are dire consequences for getting it wrong.
This morning I hope I have given you an insight into the work the Australian Government is undertaking to promote growth in our country and our region.
I hope you will share your own experience so we can learn from you. I wish you an enjoyable and productive time at the Summer School.Thank you.