'Benefit of hindsight': ASIC may have been wrong body

One of the architects of Australia's financial system has expressed doubts about the policing power given to one of the corporate regulators now under fire for failing to prevent fraud and deception by the banks.

Professor Ian Harper was a member of the Wallis committee of inquiry into the financial system which in 1997 recommended the creation of a specialist organisation to regulate financial markets and financial institutions known as the Australian Securities and Investments Commission, or ASIC.

He later chaired the Harper Competition Review for the Abbott and Turnbull governments, and is a Reserve Bank of Australia board member.

Critically, the Wallis recommendations allowed ASIC to take over responsibility for policing consumer laws previously conducted by the Australian Competition and Consumer Commission.

On Tuesday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern it would become too close to the institutions it regulated.

“The argument in favour of leaving consumer protection with the ACCC was that it wouldn’t be captured,” Professor Harper told Fairfax Media. “One day it deals with the electricity industry, the next day it deals with Coles and Woolies. It doesn’t have time to become close to the industries it polices.

“The argument against a specialist regulator is that it will succumb to the ‘Stockholm Syndrome’, that the regulator and the industry will hire from each other and go to the same conferences and so on.

“We now know of clear cases in which ASIC has been misled. Would it have tried harder, would it have made further inquiries had it been less close to the organisations it regulated? It might have.”

Regulatory agencies like ASIC have come under fire at the royal commission but are yet to appear at hearings. Asked if the ACCC would be prepared to take back responsibilities ceded to ASIC a spokesman for ACCC chairman Rod Sims declined to comment.

Professor Harper said concern about being too close to industry was one of the reasons the Wallis Review recommended the creation of a body separate from the Reserve Bank to oversee the prudential health of the retail banks.

“I have already said that with the benefit of hindsight we were wrong about several things,” Professor Harper said. “We placed too much faith in the efficient market hypothesis and in light touch regulation, we said the government didn’t need to guarantee bank deposits.

“With the benefit of hindsight and what's been coming out at the royal commission, the weaknesses of the specialist approach we took to regulation are also evident.”

It was “quite apparent” that the ACCC would have been able to handle the complexities inherent in financial products without needing to defer to a specialist body, he added. He noted the competition watchdog was more than capable of handling energy pricing, petrol pricing and the complex relationship between petrol stations and supermarkets.

Had it retained responsibility for policy consumer laws as well as responsibility for competition laws governing market power and mergers and acquisition which it kept, Australia’s financial landscape might have been different.

“It was 20 years ago, we would have been expected to learn something,” Professor Harper said.

The royal commission hearings will reconvene on Thursday.

In The Age and Sydney Morning Herald

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ASIC chief: The banks are having us on over tracker mortgages

Australia's top financial regulator has dismissed as self-serving arguments by the big four banks that they can't afford to offer so-called "tracker mortgages" whose rates would automatically rise and fall in line with the Reserve Bank cash rate.

Westpac, the Commonwealth, ANZ and National Australia banks each argued in parliamentary hearings earlier this month that there would be little demand for tracker mortgages of the kind that are offered in the United States and Britain because they would have would have to charge too much for them.

In testimony on Wednesday, Australian Securities and Investments Commission chairman Greg Medcraft tabled a 10-page briefing note he said showed each of the bank's funding costs "completely tracked" the cash rate.

"And the reason for that is not really rocket science, it reflects the fact that 60 per cent or more of their funding comes from deposits, which are based on the cash rate," he said.

"Where they get it wrong on funding, that risk shouldn't be passed to the borrower. All a tracker rate would mean is having, like in most parts of the world and in corporate Australia, a rate that is a simple margin over a benchmark."

On Monday, a small Queensland bank, Auswide, launched what is believed to be Australia's first tracker loan, offering 3.99 per cent, which would vary only in accordance with the cash rate.

The rate cannot fall below 2.49 per cent - which it would hit if the Reserve Bank cut the cash rate to zero.

Mr Medcraft said the fixed margin would last for the entire life of the loan, a better deal than was offered overseas, and said that if a little bank could do it, "a big bank can do it".

"It may be technically correct, as the banks have argued, that they don't fund off the cash rate," his briefing paper said.

"However, overall, the weighted average funding cost for a major bank is correlated to the prevailing RBA cash rate. This is because most debt securities and deposit products either automatically adjust or are hedged using interest rate derivatives against adverse interest rate movements."

"I think that this would actually assist borrowers to have greater trust and confidence in rates, which would allow them to think about switching mortgages more easily," said Mr Medcraft.

"They wouldn't be confused between movements in the margin and movements in the standard variable rate as they are today. Comparability would not be an issue."

In The Age and Sydney Morning Herald

Read more >>

FOFA. How Palmer was conned. The rotten underbelly of Australia's financial advice industry

Clive Palmer has been conned. In the most exquisite of ironies he has allowed the Coalition to water down financial advice rules without first seeking advice.

"I didn't become a billionaire by listening to advisers," he said after he closed the deal, dismissing concerns the regulations he had endorsed would condemn ordinary Australians to years more of seeing advisers partially on the take from the firms whose products they advised on.

He’d insisted on safeguards. Fees and payments would be out in the open. It would help.

Palmer has probably never sought advice from George Loewenstein. The Carnegie Mellon University professor does cutting-edge research in the netherworld where economics meets psychology.

His examination of this very topic is called “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest.”

Loewenstein says if advisers admit they are getting kickbacks their clients often don’t know how to assess the information. The clients don’t know much about the field. That’s why they are seeking advice. Sometimes it makes them more trusting. If an adviser is going out of his or her way to be honest the client might “place more rather than less weight on the adviser’s advice”.

The adviser on the other hand might feel emboldened, “exaggerating their advice in order to counteract the diminished weight that they expect estimators to place on it”.

His experiments find advisers make more money when they disclose kickbacks and their clients make less (because they receive even more biased advice). They are also keener to help out advisers by buying the products that will give them kickbacks.

If you doubt that Australians are extraordinarily bad at appraising the worth of their financial advisers, consider the results of this Australian Securities and Investments Commission survey, detailed in the interim report of the Murray financial system inquiry delivered on the day that Palmer caved...

Eighty six per cent of the Australian customers surveyed said they had received “good quality advice”.  Eighty one per cent said they trusted the advice “a lot”. But when ASIC examined the advice if found only 3 per cent was good, 58 per cent was adequate and 39 per cent “poor”.

The advisers who renounced commissions were the most likely to provide good advice.

“Unsurprisingly, where advice fees were contingent on a product recommendation there were numerous examples where the advice appeared to be structured towards recommending or selling financial products,” ASIC reported.

The regulations Palmer has agreed to will allow banks to continue to reward advisers for shifting their products. The only constraints are that the advisers must work for the banks, they must style themselves as “general” rather than “personal” advisers, the payments can not be ongoing and they must not be made “solely” because of the volume of product they have shifted.

Payments or in-kind payments not linked to the sale of a particular product are fair game, among them payments for training, promotion, conferences in remote locations, the upgrade of computer systems and direct payments to staff who “execute” trades recommended by advisers.

They are generous loopholes. They would have been illegal had Palmer not caved.

The Murray report doesn’t think much of them. It has suggested banning the use of the term “adviser” in such circumstances, relabeling it “sales” or “advertising”.

The inquiry’s chair David Murray knows about what masquerades as financial advice in Australia. He used to run the Commonwealth Bank.

“Advisers” are allowed to practice in Australia with as little as six hours training, although it’s often more - sometimes six weeks. In Canada, Hong Kong, Singapore, the United Kingdom and the United States would-be advisers need to sit a national exam. Not here. I know of one economist with impeccable finance market credentials who wanted to work as a financial adviser to give something back He was turned away because he hadn’t worked in sales.

Unfathomably, there’s not even a public register of who does and who does not have an adviser's licence. (Palmer is on to this one. He demanded a register as a condition of agreeing to water down the rules.)  If there was a register potential clients could see how long an adviser had been practicing and whether they had ever been struck off.

So limited are the regulators powers that when advisers do get stuck off they simply pop up elsewhere. Murray says ASIC can prevent someone being an adviser but can’t prevent them from managing advice firms, something stuck off advisers often do.

In Britain the Financial Conduct Authority has “product intervention” powers. It can review products or product categories and take them off the market. In Australia ASIC can only warn.

And it can do next to nothing about advisers who sell insurance. Incredibly effective lobbying by insurance providers means that under both Labor’s old rules and the Coalition’s new ones advisers can continue to accept commissions from insurance companies. It’s why advisers often ask: “Would you like insurance with that?”. The commission is often as much as 110 per cent of the first year’s premium. It’s a powerful incentive for advisers to advise their clients to switch, regardless of the consequences.

David Murray is on to it, even if Clive Palmer is not. But there’s hope. The regulations Palmer waved through apply only until December 2015. In November 2014 David Murray presents his final report. Palmer’s no fool. He would probably be horrified at the state of the industry if he took wider soundings. He has 18 months in which to do it.

In The Age and Sydney Morning Herald


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ASIC is strange and threatening. Ask Centrebet

ASIC has regained its sense of humour. Fourteen months after threatening directors of the betting agency Centrebet with fines and potential prison terms if they continued to offer bets on Reserve Bank interest rate hikes, it has quietly relented.

The bookmaker is offering $1.20 per successful $1.00 bet on “no change” at the Bank’s June board meeting, and $3.25 for a successful bet on a rate hike.

The standoff between ASIC and the bookmaker has seen its competitors continue to ply their trade on the first Tuesday of every month, with only Centrebet apparently prevented by a range of sanctions including “court orders shutting down your business”.

The difficulties began for the Alice Springs based bookmaker early last year when it announced plans to expand its range of its products to betting on the level of the ASX 200.

ASIC executive Jonathan Coultas wrote to Centrebet’s directors on March 26 saying "it has come to the attention of the Australian Securities and Investments Commission that you may be carrying on a financial services business without holding a financial services licence."

"In particular we believe the financial bets you offer over the ASX 200 share index and RBA interest rate changes may be 'derivatives', as defined in the Corporations Act."

The penalties for trading in derivatives without a licence included up to two years in prison.

“ASIC can take you to court and seek orders that stop you carrying on a financial services business without a licence,” the letter continued. That is, ASIC can seek court orders shutting down your business.”

So threatening was the letter... (it demanded a reply by April 9) that Centrebet abandoned its market on Reserve Bank rate moves and put on ice its plans for a market on the ASX-200.

Throughout all of this time competitors such as sportsbet.com.au continued to offer odds on Reserve Bank board decisions without attracting ASIC’s attention.

Even after the Herald alerted ASIC to Sportsbet’s widely publicised market, sending it as copy of a Sportsbet press release and asking it whether it intended to act against it as had Centrebet, ASIC it took no action.

The royal wedding and the Queen’s hat brought about the thaw.

Centrebet’s Neil Evans approached ASIC in the leadup to the wedding seeking formal approval to offer a market on the colour of the hat.

He found ASIC surprisingly accommodating and pressed his luck by asking about the Bank.

“They said yes,” he told the Herald. “After all this time they didn’t mind.”

Mr Evans says he does not have the approval in writing, but he was told very clearly he could safely trade in Reserve Bank rate moves.

“But not in ASX indexes. They won’t approve that. It was our move on the ASX they after all along,” he said.

ASIC itself wouldn’t comment last night, taking questions about its assurance to Centrebet on notice. (it demanded a reply by April 9) that Centrebet abandoned its market on Reserve Bank rate moves and put on ice its plans for a market on the ASX-200.

Throughout all of this time competitors such as sportsbet.com.au continued to offer odds on Reserve Bank board decisions without attracting ASIC’s attention.

Even after the Herald alerted ASIC to Sportsbet’s widely publicised market, sending it as copy of a Sportsbet press release and asking it whether it intended to act against it as had Centrebet, ASIC it took no action.

The royal wedding and the Queen’s hat brought about the thaw.

Centrebet’s Neil Evans approached ASIC in the leadup to the wedding seeking formal approval to offer a market on the colour of the hat.

He found ASIC surprisingly accommodating and pressed his luck by asking about the Bank.

“They said yes,” he told the Herald. “After all this time they didn’t mind.”

Mr Evans says he does not have the approval in writing, but he was told very clearly he could safely trade in Reserve Bank rate moves.

“But not in ASX indexes. They won’t approve that. It was our move on the ASX they after all along,” he said.

ASIC itself wouldn’t comment last night, taking questions about its assurance to Centrebet on notice.

Published in today's SMH and Age


Asic to Centrebet


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Banks to stop gouging... unless you're already being gouged

Big banks will be put under further pressure this week when the government releases the formal definition of the term "gouging" that it will use to guide prosecutions.

Since July it has been illegal for a bank to charge a mortgage exit fee any higher than needed to cover its costs.

But until now no banks have been taken to court because the Securities and Investments Commission has been preparing what it calls "regulatory guidance" detailing what it will regard as unfair.

Prime Minister Gillard said yesterday the guidelines would be a further step in cracking down on the fees "that keep people bound into their banks even though they want to change, because they want to shop around and get a better deal".

Treasurer Wayne Swan said they would "give customers of banks the capacity to walk down the street and get out of some of those very unfair mortgage exit fees that keep them locked in to their existing bank"....

But for most of Australia's 2.5 million mortgage holders they will do little. The law that came into force in July only applies to mortgages entered into after that date. Customers on existing mortgages with exit fees that run into the thousands will remain trapped by those fees.

The guidelines are also unlikely to result in many prosecutions, although that's the idea.

Government sources say that once they are published few banks are likely to contravene them, meaning customers will get protection without the need to use the courts.

ASIC ran the draft rules by the banks five months ago and has been refining them since.

The much-vaunted bank-switching package unveiled by the Treasurer in late 2008 is barely used with Freedom of Information documents revealing as few as 1818 mortgage holders lodged forms in its first year. The so-called "hotline" set up to offer advice on switching is actually the ASIC switchboard and the bank switching website contains at least one broken link.

For the moment the rewards from switching are the greatest they have ever been. For the first time since the Reserve Bank began announcing rate moves in 1990 three of the big banks have held off announcing their responses, opening up a record gap with the Commonwealth Bank after it pushed up rates 0.45 points.

With the Commonwealth's standard variable rate now 7.81 per cent and the National Australia rate for the moment 7.24, the saving on a $300,000 mortgage amounts to $111 per month.

Next month the Treasurer will announce a series of moves to crackdown on price signalling - where banks use the media to tell other banks how they intend to move on rates.

Shadow Treasurer Joe Hockey is preparing his own legislation to crack down on the practice and the independent Senator Nick Xenophon has called for the
Competition and Consumer Commission to be given the power to tap bank phones.

"The ACCC already has phone-tapping powers for cartel behaviour," he said. "I think it is entirely reasonable for them to have similar powers when it comes to allegations of price-fixing or price-signalling.''

Published in today's SMH and Age


Bank Account Switching Package FOI Documents



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The Millionaires' factory's fight to survive

Brilliant work from Michael Evans and Ian Verrender in this morning's BusinessDay:

EXCLUSIVE

As the tsunami engulfing global markets in September 2008 crashed into Lehman Bros, a besieged Macquarie Group wasted little time swinging into action.

Under attack from short selling hedge funds and with its share price plunging by half, Macquarie launched a concerted lobbying effort with the government and regulators.

Documents obtained by BusinessDay under freedom of information laws reveal the haste and well-targeted strategy Macquarie employed as the maelstrom of the global financial crisis rocked banks around the world.

Macquarie's efforts appear to have been brutally efficient. Within days ASIC would impose a ban on the short selling of financial stocks - an investment strategy used to make money by punting on a share price falling further - that would halt the precipitous plummet of the bank's shares.

And within weeks, the government would implement a banking deposit guarantee and a wholesale lending agreement allowing Macquarie and other banks to use the government's stronger AAA rating to borrow money when credit markets were closed.

The backroom dealing began within hours of the collapse of Lehman Bros on September 15, sparking the most intense phase of the global credit squeeze.

The next day, Macquarie's Trevor Burns typed a two-page email to the head of the Treasury's markets division, Jim Murphy, with the subject line marked "confidential". The email has been identified in response to a specific freedom of information request by the BusinessDay for correspondence concerning Macquarie's representations to Treasury on the state of global financial markets...

A day later, on September 17, as global markets reeled and Macquarie shares continued to slide, a flurry of emails flew between the floors of 1 Martin Place, the old GPO building housing both Macquarie and ASIC...

Appearing to show uncommon haste, ASIC acted within two days of the first email flurry.

On September 19, it banned naked short selling, effectively ending the rout in Macquarie shares, which surged 9 per cent that day. Within days, it fully banned short selling on financial stocks.

But Macquarie was free to continue its trading activities, including short selling shares in other companies.

By early October, the government had swung into action, guaranteeing all deposits and implementing a wholesale funding guarantee.

Macquarie spared no effort to shore up support. BusinessDay understands that as part of its lobbying effort, Burns met the then financial services minister Nick Sherry to push for a ban on short selling. It is understood Macquarie's chief executive, Nicholas Moore, also met Sherry.

The flurry of activity from Macquarie is starkly at odds with repeated assurances from its chief financial officer, Greg Ward, that the bank was at no stage under threat, having ample reserves to meet all obligations. But that argument overlooks the crisis in confidence engulfing Macquarie at the time, evident in its plunging share price which hit a low of $15.75.....

Continued here.



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You wouldn't bet on it - if ASIC gets its way

The Reserve Bank will next meet to vote on interest rates a week from today, but don't expect to be able to bet on the outcome.

For only the second time in two years Centrebet won't accept your money.

The last time it believed the result was a foregone conclusion. This time ASIC has stopped it.

The Securities and Investments Commission has written to the Alice Springs based bookmaker warning that bets on interest rate changes may be "derivatives" as defined in section 761D Corporations Act.

That section defines a derivative as an arrangement in which the value of a consideration is derived from the value of something "of any nature whatsoever," including an interest rate or exchange rate.

On the face of it the section would outlaw all manner of bets including the recent high profile wager between economics professor Steve Keen and financial markets economist Rory Robertson on the value of house prices which saw the loser walk from Canberra to Kosciusko...

The letter from ASIC senior manager Jonathan Coultas to Centrebet says offering a derivative without a financial services licence "is an offence punishable by a fine not exceeding $22,000 or imprisonment for 2 years or both".

It threatens the bookmaker with "court orders shutting down your business".

"Totally shattered and a little bit confused," said Centrebet public relations manager Neil Evans when asked how he felt. "We have spent hundred of hours doing this for two years with not a word said."

Centrebet's market was hardly low profile. It has been reported on eight times in this newspaper and the odds it offers have been used as a guide to the weight of public opinion about what the Reserve Bank board will do.

Less-well known has been the market operated by Centrebet's competitor Sportsbet.com.au.

It is continuing to take bets on Tuesday's Reserve Bank board despite knowing of ASIC's threat.

Two of its bets it has taken on - each on no change in rates - are for $10,000 each.

"We have received nothing from ASIC in terms of whether we can or can't bet on that market. We will keep taking money until they tell us to stop," said spokesman Haydn Lane. "Apart from sports events and elections it is our most popular markets."

Asked why he thought ASIC had targeted Centrebet and not his organisation Mr Lane said it could be because in March "Centrebet started betting on the ASX 200, I think that sort of kicked them into action a bit with them, but we've certainly heard nothing".

Centrebet also suspects ASIC was provoked by its action last month in opening a market on the stock exchange share price index. "This other market seems to have been caught up in it. We've stopped in May but a rival bookie is going ahead."

Asked to explain why it had targeted one bookmaker but not the other an ASIC spokesman was unable to comment on operational matters. However he confirmed that ASIC had written to Centrebet.

Melbourne Law School professor Ian Ramsay said the ASIC letter had effectively shut down the Centrebet market on Reserve Bank decisions. It would not be worth the bookmaker's while to fulfill the requirements needed to get a financial services license.

For now Sportsbet.com.au is offering $1.20 for each $1 successfully bet on no change next Tuesday, and $3 for each $1 bet on a rate hike.

Mr Lane said he is hoping he doesn't have to stop mid-stream and give back the money.

Published in today's SMH and Age


Asic to Centrebet


AFR Editorial, April 17:

ASIC's nanny gambling curbs just don't rate

It's become commonplace in the wake of the global financial crisis to refer to the financial system as a giant casino. And in a sense that's true. But the critical issue is not that large amounts of money are wagered on predictions of future events, but that those making the bets may be unaware of the proper odds, or that the races are fixed. Or indeed that they are wagering at all.

Post-crisis focus should be on the integrity of financial markets, malfeasance by agents, structural imperfections and appropriate regulation and supervision.
The scrutiny should not be on the betting per se.

For better or worse, any financial reward carries a risk, and attempting to price that risk is the business of financial markets. It's an odds play.

Now we hear the Australian Securities and Investments Commission has told betting agency Centrebet to stop offering odds and taking bets on share price indices and the Reserve Bank's monthly interest rate changes.

ASIC claimed that the "financial bets" offered over the ASX 200 share index and RBA interest rate changes may be "derivatives" as defined in the Corporations Act, and that these services may amount to a financial services business, requiring a financial services licence.

Centrebet has suspended offering odds on both markets and has written to ASIC saying it would like to continue its interest rate betting service. It's also stated that its operating licence from the Northern Territory government allows it to bet on interest rates and stockmarket indices.

Curiously, Sportsbet.com.au, which is also licensed in the NT, and also offers interest rate betting, has not received any attention from ASIC. So why the heavying of Centrebet? The online lucky shop has been offering odds on Reserve Bank rate rises since August 2008, without any comment from ASIC. But in March this year it started offering odds on the monthly finish of the ASX 200 share price index, in effect setting up in competition to the ASX. Centrebet stated at the time that it also planned to extend its financial betting to the oil price, and individual stocks as well, although those latter plans are apparently now on hold.

Centrebet is trying to expand its market beyond the traditional gambler to appeal to white collar financial types. And it was succeeding. It received 200 bets on the monthly close of the S&P/ASX200. Now ASIC may well be right; Centrebet's activities with respect to the share price index may technically contravene the law as written. The interest rate betting is more uncertain.

But really, is this something to which a very stretched, crucial agency should be devoting time and resources? Is the spirit of the law intended to stop such bets? Why has it acted now, instead of August 2008, and why has Centrebet been singled out?

Does ASIC really think the integrity of financial markets is being compromised because maybe some investment bank's forex desk or options traders are laying off the RBA rate rise risk by flipping screens and hedging with Centrebet?

For the punter, the monthly RBA board meeting and the daily sharemarket are probably two of the cleanest markets you could hope for. If those markets are fixed, then ASIC would really have some worries.

So, too, if punters were pulling their money from their superannuation and wagering it on Centrebet's ASX200 with a side bet on Martin Place in Race 5 at Randwick.

But there is no evidence of this happening. Those making such a bet can be perfectly sure what they are betting on, the odds being offered, and the counterparty they are dealing with.

Gambling, love it or hate it, is part of the Australian culture. Punters know they are making a bet when they go to a bookmaker. This is not a market we need to be nannied in. Centrebet should be free to resume taking bets on interest rate changes and ASIC should concentrate on bigger issues than a Darwin bookmaker straying into turf that the Australian Securities Exchange regards as its monopoly.



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No betting. The RBA loses its fun

Can this really be the end?

ASIC has moved to shut down betting on Reserve Bank interest rate decisions, giving the the bookmaker Centrebet until today (FRI) to desist or face the possibility of a court order "shutting down your business".

The letter from ASIC senior manager Jonathan Coultas to Centrebet seen by the Herald says "it has come to the attention of the Australian Securities and Investments Commission that you may be carrying on a financial services business without holding a financial services licence."

"In particular we believe the financial bets you offer over the ASX 200 share index and RBA interest rate changes may be 'derivatives', as defined in the Corporations Act."

The penalties for trading in derivatives without a license include up to two years in prison.

Melbourne Law School professor Ian Ramsay said it would be not be worth the bookmaker's while to run through the hoops needed to get the license. The letter would effectively shut down its market on Reserve Bank board decisions...

Centrebet has removed the ASX 200 and Reserve Bank markets from its website.

It took more than $45,000 on March Reserve Bank board decision and has taken more than $1 million over two years on the outcome of Reserve Bank meetings with the punters marginally in front.

"We didn't know we were selling derivatives," said Centrebet public relations manager Neil Evans. "We thought we were taking bets, the same as we do on the outcome of sporting events and elections."

"We've been doing it for two years without complaint. Now ASIC says it has come to its attention."

Professor Ramsay said ASIC may have turned its attention to the bookmaker following a complaint from a competitor after it set up a market on the ASX 200 share price index in March.

"Once ASIC took an interest it would have reviewed other activities of Centrebet including betting on interest rates, that's a possible scenario for how this unfolded.

Mr Evans said he was shattered and confused. "We have spent hundred of hours doing this since 2008 with not a word said."

ASIC confirmed the existence of the letter but would not comment.


Published in today's Age on line


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A punt is a punt, except when ASIC says its a "derivative". ASIC shuts down RBA betting

Oh my. They may be wrong in law, but who's going to fight them

Punters think of them as bets, but to ASIC they are apparently "derivatives".

The Securities and Investments Commission has threatened the Northern Territory based bookmaker Centrebet with a court order "shutting down your business" if it continues to run take bets on the outcome of monthly Reserve Bank board meetings without a financial services licence.

Centrebet has taken nearly $1 million in bets on the outcome of Reserve Bank board meetings in the past two years without complaint from ASIC. The markets have received wide publicity and have been listed on its website along with markets on elections and sporting events.

Yet in a letter to Centrebet dated March 26 ASIC's senior manager, market participants and stockbrokers Jonathan Coultas says "it has come to the attention of ASIC that you may be carrying on a financial services business without holding a financial services licence"...

"In particular we believe the financial bets you offer over the ASX 200 share index and RBA interest rate changes may be 'derivates', as defined in the Corporations Act," the letter continues.

"Carrying on a financial services business without an Australian financial services licence is an offence punishable by a fine not exceeding $22,000 or imprisonment for 2 years or both".

"ASIC may also decide to take other actions in relation to your conduct. For example... ASIC can seek court orders shutting down your business."

Centrebet public relations manager Neil Evans described himself as "totally shattered, and a little bit confused".

"We founded interest rate betting in this country in 2008, and not a word was said."

"Our operating licence from the Northern Territory government allows us to bet on financial markets."

ASIC confirmed that it had sent that letter but would not answer questions about why it had done so now rather than earlier in the life of the widely publicised market.

The answer might lie in Centrebet's action in March in establishing a betting market on the ASX 200 shareprice index which had the effect of competing with products offered by the ASX itself.

There are few precedents to guide either ASIC or Centrebet should the matter go to court.

ASIC has given the agency until Friday to respond.

In the meantime Mr Evans said Centrebet will not take bets on either Reserve Bank decisions or the share price index. In the language used by ASIC, it will not sell derivatives.

Published in today's SMH and Age

Asic to Centrebet


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If it's an offence to sell alcohol irresponsibly...

Why not loans? It soon will be

MORTGAGE brokers, bank employees, payday lenders and retailers offering credit will face fines and even jail under new "responsible lending" rules set to become law in November.

The provisions, in draft legislation unveiled by Corporations Minister Nick Sherry will for the first time require all credit providers to be licensed and will make it an offence to supply unsuitable credit that can't be repaid.

The maximum penalty will be five years' jail and a fines of up to $220,000 for an individual and $1.1 million for a corporation.

The new laws will bring under Commonwealth control a range of practices that were previously state-regulated and will regulate others for the first time...

The Australian Securities and Investments Commission will be given an extra 200 staff in order to oversee credit providers.

"I can assure you that we will be extremely proactive in administering these laws and vigilant in their enforcement," said ASIC Chairman Tony D'Aloisio.

"We will have to register some 10,000 entities. Around 5.7 million households have some sort of debt. Around 2.9 million have a home loan; 750,000 have an investor loan and 2.3 million households have a credit loan."

Banks, credit unions and building societies yesterday attacked the new provisions as "heavy-handed", saying they would result in higher loan fees and a longer delays in approvals.

"While the Federal Government is suggesting this will improve consumer
confidence, the real question for the Government is what will this do for the
confidence of the main body of credit providers, which is much needed in the
present economic circumstances," said Bankers Association Acting Chief Executive Tony Burke. "The penalty regime is disproportionate."

Abacus, which represents credit unions and building societies, welcomed the new laws for replacing ineffective state regulations but warned they ran the risk of "burying" responsible lenders in bureaucracy.

"Focus the legislation on the poor behaviour of dodgy lenders and brokers - don't drive up the cost of borrowing with ineffective red tape," said Abacus chief executive Louise Petschler.

Senator Sherry was unapologetic, saying the Rudd government intended to crack down on irresponsible lending, and "dodgy providers of credit finance and dodgy advisers".

"For example margin lending has been of significant contention over the last 18 months. There have been individuals who only had their own home as the asset to support the lending to buy shares, and/or had a very low income. It will be practically very, very difficult for individuals to enter into margin lending with these new laws."

As previously foreshadowed Australians with mortgages of up to $500,000 will be able to apply to change their credit contract if they get into financial difficulty, an increase in the threshold from $312,400.

The Bankers Association said the provision was unnecessary as its the banks' own hardship principles already went further and did not apply a threshold.

"It is important that customers understand that if they are experiencing any problems in repaying their loans, they should contact the bank as soon as possible," Mr Burke said.

The government plans to introduce the bill in June after a four-week public consultation period and expects it to be passed in September.

* Actually there are several arguments as to why not loans. Nick Gruen spells them out.

Also if it is to be done ASIC is arguably the wrong body to do it. Is less conflicted when it comes to regulating finance providers, has a better record of getting good outcomes for consumers, and will have to deal with the "non-finance" bit of many transactions (eg the house itself) anyway.

And by adopting national rather than state regulation we lose the ability to try things out. The Minister Nick Sherry acknowledged how useful this could be when he said in launching the new scheme:

"Payday lenders will be covered by this legislation. I think three states have a 48 per cent cap. That will be retained.

What we are doing is adding this new responsible lending principle for the first time. Those states that don't have a 48 per cent cap, we're going to ask them not to impose a 48 per cent cap, and then we will assess the outcomes; we'll look at what has happened in the states that have a 48 per cent cap and those that don't, with a responsible lending provision that has come into force, and we'll look at what the outcomes are and determine whether it is appropriate to maintain that 48 per cent cap.

It's a good example, I think, of a practical way to assess the evidence in an area where there was strong disagreement between the various people, organisations who were consulted."

But these are quibbles.

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At last, genuine help instead of diversions

Investors facing hardship have been thrown a lifeline as Prime Minister Kevin Rudd concedes it will be tough to avoid a recession.

The Securities and Investments Commission told mortgage funds late yesterday that, on request, it would amend the rules governing their operation to allow them to give preference to people in genuine hardship when deciding who gets access to limited funds.

At present the funds are required to treat all members equally when deciding whether to allow redemptions.

The change would allow them to give preference to members who are "unable to meet reasonable and immediate family living expenses". Those members would be limited to withdrawing a maximum of $20,000 each, plus half of the balance of their investment. This would mean that a member with $100,000 in a frozen fund would get access to $60,000.

ASIC chairman Tony D'Aloisio defended the cap, saying it would ensure hardship cases continued "to participate in the risks and rewards of the investments along with other members".

The Investment and Financial Services Association welcomed the move as "genuinely good news".

"ASIC needs to be commended for the work they have done and the time they have done it in," association chief executive Richard Gilbert said.

But he could give no guarantee that every one of the 15 or so funds that have frozen redemptions would take advantage of the offer..

"It will depend on the circumstances of each fund and the liquidity of the fund and its cash flow," he said. "We will do our best to expedite the process but I can't put days or weeks on it."

Mr Rudd adjusted his language on the economy, openly countenancing the possibility of a recession.

Avoiding a recession was "the core challenge of the Government," he told Fairfax radio.

Mr Rudd said he agreed with the Reserve Bank deputy governor that Australia probably could avoid a recession but that "the other thing to say in levelling with people is that this will be tough, very tough".

"Most other developed economies around the world are either in recession or heading there right now, and we are part of a global economy," he said.

Reserve Bank data released yesterday showed consumer credit shrinking faster than at any time since the 1991 recession as households paid off debts or decided against new borrowing.

ANZ economists said that underlying consumer debt might be shrinking even faster than the September figures suggested as they would have been artificially boosted by borrowing to cover margins in a month in which the share market fell 10%.

Mr Rudd said he was confident that "a fair whack" of the bonus payments the Government would be sending to pensioners, families and carers in December would be spent but that he could not be certain.

"At the end of the day I can't predict what each individual consumer is going to do with their money," he said, adding that this was "one of those times when the entire nation will try very hard to pull together".

Other data released yesterday showed that home sales fell further in September despite that month's 0.25 percentage point interest rate cut and a further 4.5% slide in job vacancies in October.

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The ever-evolving guarantee

Our Treasury is working 24/7

Deutsche Bank have just provided the following update:

"In a data flash published this morning we noted that the statement on the design and operational parameters of the deposit and wholesale funding guarantee had been removed from the Treasury's website. We speculated that there could be some amendments to the design of the guarantee. The design and operational parameters have been reinstated on the Treasury's website.

There is one substantive change from the policy as previously stated and some clearer wording on another aspect.

- The substantive change is the removal of the earlier wording that "until that date [28 November 2008] the guarantees will not be available to foreign bank branches." We take the specific removal of this statement to mean that foreign bank branches (FBBs) will be covered by the guarantee from today. That is, deposits and wholesale funding eligible for the guarantee arrangements will be covered from now.

- In terms of wording, the statement makes it clearer that the $1 million fee-free threshold "applies per depositor per institution." Thus there is explicit recognition that "all types of legal entities" will be able to split their funds across multiple Authorised Deposit Taking Institutions in order to gain access to multiple fee-free thresholds.

- In our view the ability to do this could seriously undermine the intent of the threshold, which is "reduce the incentive to move funds from the short term money market into deposits." As we move into an environment of a low cash rate the incentive to avoid the fee will grow and the large number of ADIs could see money market funds make a concerted effort to spread their cash around. If this occurs then it will seriously impact on the ability of non-bank issuers to raise funding from money market funds. We think a better policy option would have been to impose a `system' cap of $1 million on the fee-free threshold. We don't think it would have been too difficult to ensure self-regulation of this requirement, certainly for the wholesale industry."

Also tonight the Treasurer has provided more money for APRA, ASIC and the Treasury. Thank goodness...

"Today the Rudd Government is announcing additional funding for the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Department of the Treasury.

This will ensure that our regulators continue to have the resources they need to maintain the strength of Australia’s financial system during the global financial crisis.

Australia’s regulators are first class and these measures will ensure that the Australian people can continue to have absolute confidence in the performance of our regulators during the global financial crisis.

Our regulators have stepped up their monitoring and other activities as the global financial turmoil has unfolded. This has been critical in ensuring the strength of Australia’s financial system, in the face of the most significant upheaval in global financial markets since the Great Depression.

The intensification of the global financial crisis over recent weeks has resulted in a greatly increased workload for our regulators. This additional funding will ensure that the regulators continue to have sufficient resources to fulfil their roles in light of global developments.

The additional funding to APRA will also enable it to respond to applications from entities seeking to become authorised deposit-taking institutions (ADIs), where they are able to meet Australia’s prudential regulatory requirements.

As ADIs these entities would be able to take deposits and would be eligible for the Government guarantee on deposits.

The additional funding totals $83 million over four years with $21.5 million in 2008-09, $43.5 million in 2009-10, $9 million in 2010-11 and $9 million in 2011-12.
Of this additional funding, APRA will receive $9 million in 2008-09 and $18.5 million in 2009-10, and $9 million in each of 2010-11 and 2011-12 to enable it to manage the effects of the global financial crisis.

This funding will be provided from the Budget, rather than being recovered from levies on the financial sector. These arrangements will be reviewed in the 2009-10 Budget context and in light of developments in global financial markets.

Of the additional funding, ASIC will receive $10 million in 2008-09 and $20 million in 2009-10 to help it manage the domestic and international implications arising from the global financial crisis.

This funding will provide ASIC with additional ‘front-line’ resources for market monitoring and enforcement activities to further strengthen confidence in Australia’s financial markets.

Of the additional funding, Treasury will receive funding of $2.5 million in 2008-09 and $5 million in 2009-10 to ensure Australia’s regulatory environment continues to be world’s best practice and to pursue reform of the global financial architecture, through the G20 and other international forums.

The Government will ensure our regulators remain appropriately resourced throughout the global financial crisis and will continue to review funding requirements as the crisis unfolds."

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Australia gets a crisis action plan

The Reserve Bank has detailed grave concerns about the future of the worldwide financial system as Australia's four key regulators have signed a historic pact outlining how each will act in the event that an Australian bank fails.

The "crisis management" memorandum agreed to by the Bank, the Treasury, the Prudential Regulation Authority and the Securities and Investments Commission sets out a "co-ordinated response to potential threats to the stability of Australia's financial system."

The Bank's Financial Stability Review released yesterday says while the four organisations have worked together well so far during the financial turmoil, the memorandum will "further strengthen these relationships and improve public understanding".

The memorandum sets out which organisation will do what, the overall objectives to keep in mind, and the way in which the organisations will work with each other.

Lack of co-ordination is thought to have been one of the main reasons that the US was slow to respond to its crisis in its early stages...

In the United States President George W Bush warned that the entire US economy was in danger unless the Congress passed the Treasury's $US700 billion financial sector rescue plan.

"We are in the midst of a serious financial crisis,'' he told the nation in a televised address.

"Major sectors of America's financial system are at risk of shutting down. Our entire economy is in danger.''

In Australia the ANZ chief executive Mike Smith said there would a depression if the plan was not approved by Congress.

"I actually believe that the sheer seriousness of last week's events is not properly recognised," he said.

"I think the banking system in the US would go into a complete, yes, would freeze is a good word, and the knock-on effect of that on payments systems throughout the world would be huge."

"If Congress does not approve the plan I think I'll take up farming".

The Reserve Bank also came out in favour of the plan, warning in its Financial Stability Review of a "damaging feedback loop running from the financial sector to the economy and back to the financial sector".

The danger was compounded by "a straining of the bond of trust between many banks and investors".

This has come after "a number of years in which investors were prepared to borrow heavily to buy risky assets at fine margins".

"With the pendulum now having swung the other way, the adjustment is proving more difficult and costly than many had expected," the Bank said in its review.

Australia's financial system has coped better "than many others".

Australia's big five Australian banks reported headline profits after tax of around $10 billion in the first half of this financial year, up 12%

By contrast the total profits of the US institutions insured by the Federal Deposit Insurance Corporation were down 75%.

Non-performing assets accounted for only 0.7 per cent of Australian banks' balance sheets, and non-performing housing loans accounted for only 0.4% of housing lending.

However in parts of western Sydney non-performing loans were much higher - exceeding 1.6%.

"Nationwide, the six areas with the highest arrears rates are all in western Sydney, the Bank said.

The evidence suggested that the "newer lenders, seeking to increase their market share, in part through looser lednign standards" had been "particularly active" in western Sydney



Memorandum of Understanding

Parties: Reserve Bank, APRA, ASIC, Commonwealth Treasury

Responsibilities:

RBA- maintain financial system

APRA - protect depositors, policyholders and fund members

ASIC - ensure market integrity

Treasury - advise on implications and threats

Objectives:

. Minimise super fund and bank losses where possible

. Maintain confidence in financial system

. Ensure that owners and directors of distressed institutions bear appropiate responsibility

. Minimise economic impacts

Co-ordination:

- Information to be shared.

- The Treasurer to communicate with the public.

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Australian Financial Planners are shockers!

As this ASIC investigation reveals.

I discussed this with Geraldine and also reported on it for The Business Show. In July 2003 I reported for SBS on analogous situation of mortgage brokers, also the subject of a report for ASIC.

A lot of the problem is commissions, particularly trailing commissions, and in the course of preparing my SBS report I was astonished to discover that neither ASIC nor the Financial Planning Association knew what proportion of planners accepted commissions and of what kind!

I also discussed with Geraldine this fascinating APRA report on the performance of superannuation funds. The industry funds, often run by volunteers did okay, as did the employee funds run by big corporations. The bad performers were the funds run for the employees of small firms and the professional and expensive retail funds. Price is no guarantee of quality!

Later in the year for SBS TV and Life Matters I reported on the success of Do It Yourself super funds. The DIYers have a catchcry: Why pay to have someone else lose your money, when you can do it yourself?

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Any complaints?

I am not a real blogger. I talk on the radio Monday mornings and (these days) take forever to blog what I have just said. When I started bogging I would go straight into the studio next door to Geraldine's and blog what I had meant to say within minutes of not quite saying it. Recently I have waited up to a week.

So here goes, to catch up.

LAST Monday 18 November I spoke with Geraldine about what happens when you try to complain.

When you see a fire and you report it, you expect the Fire Brigade to investigate. But that wouldn't be a wise expectation when you report something to the Australian Prudential Regulation Authority, the Australian Securities and
Investments Commission, the Australian Competition and Consumer Commission, or the Australian Tax Office.

The Palmer Report into APRA's conduct in the lead up to the collapse of HIH Insurance discloses an amazing mindset. "A company could not be considered to be in breach of the solvency standard until it had reported a breach in its returns." When HIH did fall below minimum solvency standards "no action was taken but to hope that it traded out of it." When in July 2000 APRA received an anonymous document that was a "road map" to HIH's troubles it warned its likely author that he was leaving himself open to legal action. HIH supervisors concluded that the comments should be treated with caution because they came from a disgruntled employee. Palmer appears to have been astounded.

APRA's attitude was partly cultural, the "London tea and bickies" approach in the words of APRA Board member Alan Cameron, and partly caused by very limited resources, according to Palmer. Only four people were supervising HIH and more than one-hundred other similar institutions, the man initially given hands-on responsibility for HIH was 24-years old with no general insurance experience.

So what?

Firstly APRA and its predecessor the Insurance and Superannuation Commission liked to give the impression that they were keeping our money safe. Some of us may have taken out insurance or extra supervision because we believed that they did.

And secondly APRA is not alone in, shall we say, a "selective" approach to complaints...

I quoted from annual reports that reveal that ASIC routinely investigates 2 to 3 per cent of the seven to eight thousand complaints it receives each year. It makes some contact with the complained about party in fifty per cent of the cases, and forty per cent of the complaints are merely "analysed, assessed and recorded."

Its lack of checking extends to prospectuses. Last year it inspected only 237 of the 913 prospectuses lodged with it. Not that the prospectuses lodged with it are squeaky clean. It had to issue stop orders for 67 of the 237 prospectuses it did examine.

The ACCC received 51,000 complaints last year. It investigated just 4,000 of them.

The copper isn't routinely on the beat.

The Tax Office copper no longer reveals in its annual reports the number of returns it selects for auditing.

The last time it did, in 1996 the number was -- 5,121.

Which isn't very many, in a nation the size of Australia.

Not that our tax returns are squeaky clean. No matter how many returns the Tax Office audits it seems the proportion that need correcting is about 70 per cent.

The last Budget gave the Tax Office an extra one billion dollars to start auditing again and the accounting profession is having kittens. They had grown so used to getting away with mistakes they'd forgotten that the act has grown just about too complex to apply, or so argues tax lawyer Michael Inglis in this and other brilliant pieces.

The Tax Office and its brethren bodies defend what they are doing by talking about "meta risk management". It is quite an interesting idea, but a bit like fighting the Taliban with technology and no troops or intelligence gatherers on the ground. And we know where that leads.

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