Appendix B: Illustrative Statement of Expectations

Introductory statement

This Statement outlines the Government's expectations about the roles, responsibilities and priorities of the Australian Securities and Investments Commission (ASIC), its relationship with the Government and other agencies and regulators, issues of transparency and accountability, and its obligations to consumers and investors. ASIC is expected to reply to this Statement with its own Statement of Intent, the key components of which would then be incorporated into ASIC's Corporate Plan.

Description of ASIC's mandate

ASIC plays a key role in achieving a sound and effective financial and corporate regulatory framework. Its objectives are to maintain, facilitate and improve the performance of the financial system (including fair and efficient markets), promote the confident and informed participation of investors and consumers, and conduct an efficient registry.

Description of the scope of that mandate, such as the entities that ASIC regulates

ASIC is a consumer credit, markets and financial services regulator. As such, it is expected to license and regulate:

• People and businesses engaging in consumer credit activities (banks, credit unions, finance companies, and mortgage and finance brokers).
• Financial markets and participants (including for licensed equity, derivatives and futures markets).
• Financial services businesses (including businesses dealing in superannuation, managed funds, shares and securities, derivatives and insurance).

Description of available regulatory tools

ASIC has a range of regulatory tools at its disposal, including education, policy guidance, licensing, supervision, surveillance and enforcement. This includes ongoing systemic risk monitoring on a continual basis, alongside proactive and reactive non-continuous supervision. The Government expects that ASIC will apply risk and evidence based guidance to identify the way that it selects and deploys these tools to effectively and efficiently achieve its regulatory objectives.

Acknowledgment of any trade-offs in pursuing mandate with available tools

ASIC operates with limited resources and the Government therefore recognises that the pursuit of an objective or use of a particular tool may come at the expense of others. ASIC should explicitly acknowledge and explain any required trade-offs, and should clearly state how it plans to allocate resources, prioritising those actions that are most directly aligned with its three regulatory objectives, given ASIC's assessment of the current risk environment.

Further, ASIC should develop appropriate MIS to undergo internal efficiency reviews every two years to ensure that resources are being deployed in the most efficient way possible. The government expects the next review to occur in 2016.

ASIC is a market conduct regulator with a range of regulatory tools, including but not limited to enforcement. While ASIC should continue to direct the majority of its resources to surveillance, supervision and enforcement, the Government expects ASIC to proportionately increase the share of education and policy guidance in order to ensure it is taking a proactive approach to managing conduct.

Policies and preferences of the Government that might dictate how ASIC delivers on its mandate

In delivering on its mandate, the Government has a preference for ASIC to:

• Use a principles based approach to regulation that identifies the desired outcomes rather than prescribing how to achieve them.
• Adopt a risk based approach to compliance obligations, engagement and enforcement, allowing for proportionate approaches suited to the size, nature, complexity and risk of regulated entities.
• Ensure consistency with overseas regulatory approaches where appropriate.

Acknowledgement of the expectations gap, that is ASIC's capabilities to effect change and known limitations on this ability

There are limits to ASIC's remit which may not be fully understood by the public, resulting in an expectations gap (that is, the misalignment between external and internal perceptions of ASIC's performance, capabilities and mandate). Educating the public of ASIC's role and limits is a mutual obligation of ASIC and the Government. This Statement of Expectations, combined with the Statement of Intent that ASIC is required to produce in response, goes some way to addressing this misalignment, by clearly describing the expectations the Government has for ASIC (in the Statement of Expectations), and outlining how ASIC will respond to each of the requirements (in the Statement of Intent).

In addition, the Government encourages ASIC to focus on addressing misaligned perceptions on a number of key areas over the coming year:

• Ensuring that the way in which ASIC positions its activities and tools does not result in a misconception of the extent and limits of that activity. In doing so, ASIC should ensure it aligns language choice with learnings from behavioural economics. For example, there may be a misunderstanding among some investors as to the extent to which ASIC conducts due diligence analysis (rather than just compliance checking) when licensing an intermediary. This may also extend to confusion as to the extent to which ASIC vets public issuances (as opposed to simply requiring the disclosure of certain information).
• Ensuring that it clearly describes its approach to policy consultation, including the methodology used to select stakeholders for consultation and how it uses the output of the consultation process in formulating policies and guidance. This will address stakeholder concerns and thus help to ensure that they are willing to contribute to the consultation process. Participation of stakeholders in this process is an important part of achieving optimal regulatory outcomes.

Explicit identification of the expansion of ASIC's mandate, functions or activities

ASIC's mandate is subject to change over time as the regulatory needs of the Australian economy and markets change. A
SIC must ensure that it develops strategies and the necessary internal capabilities to address any expansion of its mandate. The Government, in turn, has an obligation to articulate the additional resourcing to be provided for new functions.

In the coming year, ASIC should ensure that it develops clear strategies with regard to the registering of financial advisors, for which it assumed responsibility in 2015. In administering this role, the Government expects that ASIC will ensure registry is cost effective, timely and easy.

Recognition of the external factors which impact ASIC's ability to achieve its mandate

There are a number of factors that influence the extent to which ASIC is able to achieve its mandate. These include:

• The regulatory framework that establishes its mandate and powers (including the statutory and legislative framework).
• Resource availability, that is, government funding.
• The extent to which the use of regulatory tools identifies and deters misconduct.
• The level of misconduct actually occurring.

ASIC is able to influence these factors through:

• Making the Government aware of any significant impediments imposed by the statutory and legislative framework, and identifying these constraints in ASIC's Statement of Intent and Corporate Plan.
• Ensuring it operates as efficiently as possible.
• Continually improving the way in which it uses the regulatory tools at its disposal.
• Using those tools to deter misconduct.

It is expected that ASIC commits to reducing the overall level of risk through these actions on an ongoing basis, and communicates how it is achieving this through external reporting mechanisms.

Statement of Government's risk appetite

However, the government recognises that ASIC cannot, nor should it seek to, eliminate all risk in the financial system. ASIC's role does not involve preventing all risk in the market, or in ensuring compensation where there is a loss. Rather, ASIC's role is to reduce the level of risk through surveillance, supervision and guidance, and, where wrong-doing does occur, enforcement. Its role also involves reducing the 'misalignment' of expectations through education, in order to address circumstances where investors or financial consumers think they are bearing lower risk than the actual risk of the product or strategy.

The level of risk will vary by industry group, as will the degree to which this is misaligned with investor and consumer perceptions of risk. For example, the Government notes that investors and consumers may not be fully aware of the risks of investing in a managed fund.

ASIC should ensure that its resource allocation reflects risk concentrations and potential harms across industries. In order to identify emerging risk concentrations as rapidly as possible, ASIC should also ensure it deploys proactive supervision appropriately.

Acknowledgement of the impact of economic and market conditions

The level of risk will also depend on general economic and market conditions, which lie outside of the control of ASIC. ASIC must therefore ensure that it considers and documents how the external environment will impact its regulatory focus, and communicate this clearly to internal and external stakeholders. The Government expects it will adjust its regulatory approach accordingly, in particular, by increasing resource dedication to education and supervision of specific parts of the regulatory population where it identifies increasing risk concentrations. ASIC must also ensure that it fulfils its responsibilities for ongoing systemic risk monitoring on a continual basis.

In particular, the Government has identified a number of economic and market trends that should impact how ASIC deploys its resources over the coming year. These include:

• The current low yield environment: Where interest rates and asset yields are low, some investors may be attracted to high yield schemes in order to achieve a level of desired returns. In some instances, these investors may not be fully aware of the risks involved in extending risk appetite to achieve higher returns. As such, ASIC should deploy resources to investor education focused on risk-return trade off issues. It should also focus on supervision of market participants promoting higher yield products in order to identify possible misconduct.
• The recent elevated housing market: Where there is a significant increase in asset prices, many first-time or newer investors may be attracted to the market, where they perceive a strong probability of high returns. There is a risk that some investors will pursue investment strategies involving highly leveraged purchase of real estate assets at inflated prices. ASIC should therefore increase the use of education focused on housing investment schemes, and also surveillance of intermediaries operating within the housing sector.

Identification of key risks to which ASIC should respond

The Government expects ASIC to take a forward looking approach to managing key risks that will shape financial markets in the next 3-5 years. Along with undertaking its own analysis of key risks, the Government expects ASIC to develop strategies that address:

• Corporate culture, with a focus on business integrity and treating customers fairly. The Government expects ASIC, following appropriate analysis and consultation, to conduct targeted supervision of high risk entities to review their conduct policies, and to assess the alignment of incentive structures and risk management as a proactive approach to identifying possible misconduct.
• The need for a more innovative approach to regulation in an environment of digital disruption and financial disintermediation. We therefore expect ASIC to identify ways in which the use of regulatory tools can best be managed going forward, including where the scope of regulatory tools may need to be increased.
• Demographics and the growing need for retirement solutions. The Government expects ASIC to assess the risks of asset decumulation and to develop a new policy framework that supports the population's needs around superannuation.

ASIC must clearly document and communicate the key risks it is seeking to address, why these have been identified as priority areas, an action plan and metrics against which performance can be assessed. This should be incorporated into the Corporate Plan.

Alignment with Government priorities

Alongside these priority areas, ASIC is also expected to take into account the Government's broader policy framework and agenda, and to provide support where required.

The Government is committed to reducing red tape and compliance costs for business and the community as a critical step towards improving Australia's productivity and economic growth. The Government acknowledges the role ASIC has to play in implementing the Government's de-regulation agenda. This will include ASIC:

• Developing guidance material with a view to assisting companies reduce compliance costs.
• Enhancing regulatory impact analysis in accordance with new standards (Regulatory Impact Analysis).
• Assessing internal practices and business processes to identify areas of inefficiency, especially unnecessary cost burdens on regulated entities, and acting accordingly to address them.
• Reviewing existing guidance material and rules to identify where a principles based approach would be more appropriate, and adapting this material as required.
• Identifying specific opportunities for deregulation including through targeted consultation with regulated population.

Further, the Government will be releasing a number of legislative amendments in the coming year, for example on the regulatory framework for managed investment schemes. The Government expects ASIC to revise existing guidance material as soon as possible following these amendments.

Additionally, given the findings of the Harper Competition review and the Productivity Commission's report Business Set-up, Transfer and Closure, the Government expects ASIC to develop and document new arrangements for registering emerging business models (particularly those related to digital technology) in order to facilitate selective exemptions, for a fixed period, where regulatory requirements would otherwise deter business entry and competition.

Statement of independence

It is imperative that ASIC act independently and objectively in performing its functions and exercising its powers as set out in the ASIC Act. Nevertheless, the Government expects that ASIC take into account the Government's broad policy framework in performing its role and meeting its responsibilities. Additionally, ASIC should also consider the outcomes or recommendations of relevant Government established panels, reviews or inquiries, and consult with the Government on matters that would have significant implications for the market or regulated population.

Description of expected interactions with the responsible Minister

ASIC must provide Treasury portfolio Ministers with accurate and timely advice on significant issues, such as matters which the Government will be required to discuss in Parliament, important operational or budgetary issues and decisions regarding the appropriate action for it to take following substantial problems or disruption in the market.

The Chairperson of ASIC and the Minister must meet regularly and on an ongoing basis. Additionally, there should also be a formal year end discussion on both the effectiveness of the Commission and the overall performance of ASIC and the Chairperson's performance more specifically.

When tabling the ASIC Annual Report, the Minister will provide an Annual Ministerial Statement to the Parliament on ASIC's overall performance, especially on the degree to which ASIC meets the expectations of this Statement of Expectations and is performing in the achievement of its mandate. The Minister will also undertake to ensure that ASIC is sufficiently resourced to achieve its mandate, within the context of the Government's fiscal and budgetary policies.

Description of expected interactions with Treasury

The Government expects that Treasury and ASIC will maintain a close relationship. ASIC must:

• Provide the Secretary to Treasury with a copy of all information, briefings, press releases and correspondence provided to the Minister.
• Keep the Secretary to the Treasury appropriately informed of significant high level meetings between ASIC and Government Ministers and other key policy figures.
• Advise Treasury about changes to legislation that, in ASIC's opinion would assist in improving the regulatory framework and minimising compliance costs for business and the Community.

Treasury will take into account the views and experience of ASIC when considering and advising on changes to financial and corporate policy and legislation to facilitate consistency between the objectives of legislation and its practical implementation.

Description of the expected relationships with agencies and peer regulators

The Government expects that ASIC will maintain robust, effective and collaborative working partnerships with other Commonwealth and State and Territory agencies (APRA, the ACCC, the ATO, ACC, AUSTRAC and the AFP), as well as ASIC's counterpart regulators in overseas jurisdictions, to ensure the proper functioning of Australia's regulatory framework.

Further, ASIC is also expected to work together with the Council of Financial Regulators (CFR) and the International Organisation of Securities Commissions (IOSCO) to further develop and maintain relationships with financial regulators domestically and globally. Commissioners should identify opportunities to participate in the leadership of these organisations in order to further contribute to the regulatory agenda and the global integration of Australia's capital markets.

ASIC should also avoid duplication of the supervisory activities of other regulators, and should consider whether outcomes could be achieved by using existing regulation administered by another regulator, or other collaborative arrangements in order to ensure an integrated regulatory framework and reduce compliance costs for regulated entities.

Description of the expected use of collaborative partnerships

The Government also expects ASIC to identify opportunities to collaborate with the private sector for regulation and monitoring of particular industries where collaborative partnerships (including co-regulation, quasi-regulation or self-regulation) can deliver better regulatory outcomes, including lower costs and more effective and efficient regulation.

For example, ASIC should assess whether regulation for liquidators, auditors and insolvency practitioners could be conducted together with the relevant industry associations, based on an assessment of the extent to which these associations are able to monitor, review and discipline market participants.

Description of priority areas for cooperation in the coming 1-3 years

The Government recognises the importance of open data and expects ASIC to take an active role in promoting and developing an approach to more open government data sharing across financial regulators together with the CFR. ASIC should assist the Government in identifying the requirements of a coordinated data policy as well as legislative restrictions that need to be removed.

Description of external accountability mechanisms

ASIC is accountable to the Parliament, and ultimately to the public, through the Treasury Ministers, the Parliamentary Committee process and the tabling of its annual report. ASIC will be required to appear before parliamentary committees, including Senate Estimates and the Parliamentary Joint Committee on Corporations and Financial Services (JPC), as requested to explain actions and decisions. These reviews will focus predominately on ASIC's longer term strategic focus, rather than being overly issues-based, although there will be occasions when specific issues require scrutiny and close examination.

Guidance on external reporting requirements

ASIC is also required to provide regular external communications on key decisions and regulatory outcomes. These should be made publicly available as soon as possible, and should clearly demonstrate how these decisions and outcomes align with ASIC's strategic priorities.

The Government has recently developed a new whole of government performance management framework under the PGPA Act, and expects ASIC to be compliant with these requirements. Accordingly, ASIC must integrate these performance metrics into the Corporate Plan and subsequently report on outcomes against each metric in the Annual Report. The Government will assess ASIC's performance against these indicators as part of its oversight function in determining whether ASIC is successfully achieving its objectives and mandate.

Guidance on interactions with members of the regulated population

The Government's vision is for ASIC to be a high performing and responsive agency that sets world's best practice standards in conduct regulation and administers a principles based regulatory framework in a way that provides stability, trust and confidence in the financial system, is efficient and effective, and that balances the objectives of ASIC's statutory objectives set out in the ASIC Act, while minimising compliance costs for business and the community.