ASIC lacks bite as the UK chews down

The Conversation

In opening the Australian Securities and Investment Commission forum this week, chairman Greg Medcraft pulled no punches.

“Manufacturers [i.e. banks and financial institutions] – and, frankly, this is what annoys me — should make sure that the products that they sell, how they are marketed, who they are marketed to, are appropriate, and the consumers understand the products that they are buying.”

Medcraft went on to say:

“My position on this is clear – those selling complex products to unsuspecting investors need to wise up and do the right thing.”

I bet the assembled bankers and fund managers must have cried all the way back to their banks when told to “wise up and do the right thing”. Whether the tears were of laughter or remorse is, however, questionable.

While rightly warning against complex products, Medcraft did forget to mention that in several of the recent failures of financial companies that were regulated by ASIC, the products were not very complex at all. In fact, they were little more than simple mortgage-backed bonds and term deposits.

But Medcraft did correctly identify the huge and growing size of the Self Managed Super Funds sector as a honey pot that will prove irresistible to every financial spruiker in Australia.

Although he admitted that the current ASIC disclosure regime did have “inherent weaknesses”, Medcraft did not go so far as identifying any new regulations to head off this stampede, other than to warn that while “they [the spruikers] might get away with it for a while, but government and courts will inevitably rule in favour of investors”. Cold comfort for the investors in Prime Trust.

Compare and contrast Medcraft’s rather lackadaisical approach to consumer protection to that of the new head of the UK Financial Conduct Authority, Martin Wheatley, who just this week laid out the UK government’s vision for the new FCA.

In a blinding realisation that “an ounce of prevention” is after all “worth a [few billion] pounds of a cure”, Wheatley warned that since it was “better to deal” with problems early, “we will be on the front foot when we see things we don’t like”.

This is not just cheap talk. When the Act to set it up is finally agreed, the FCA will be able to intervene directly in the markets, and will have new “product intervention” powers that will allow the regulator to order firms to stop selling a product immediately and for up to one year.

“If necessary, we will be ready to intervene directly by making product intervention rules to prevent harm to consumers – for example, by restricting the use of specified product features or the promotion of particular product types to some or all consumers,” Wheatley said.

Note this is not just one product in one firm, but could mean a whole class of products across the industry.

While free-market advocates may need to reach for the smelling salts when reading the latest FCA rules, the new regulations are not necessarily as draconian as they might appear.

The rules are aimed at the highest levels of the firm, the board and its executives.

“So from the boardroom to point of sale and beyond, firms’ behaviour, attitudes and motivations must be about good conduct – especially in terms of the experiences and outcomes they offer their customers and clients, whether it is someone buying a basic product or completing a complex transaction.”

While the initial response from Martin Place and Collins Street to such a regime might be to claim that the sky is about to fall in on the richest banks in the world, a moment’s reflection would suggest that maybe a much better product development process could be a good thing. If products are developed properly, it will head off potentially huge fines later and/or loss of income when products are taken off the shelf. This is Risk Management 101. Manufacturers do it, so why don’t banks?

But what about the spruikers?

If the major banks and fund managers were to spend the time and effort to ensure a particular family of financial products is non-toxic to consumers and get the nod of approval from ASIC then they will have a marvellous marketing advantage over fly-by-night operators.

The vision of the UK FCA is simple: “to make financial markets work well so consumers get a fair deal”. Maybe we just need to change that to a “fair go” in the Australian context?

Pat McConnell is an honorary fellow, at Macquarie University’s Applied Finance Centre.

This story first appeared on The Conversation. Reproduced with permission.