When regulatory change goes too far

Australian Securities and Investments Commission chairman, Greg Medcraft, will leave a legacy of significant change, but product intervention powers and a user-pays regime might ultimately prove problematic.

As the chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, moves towards the end of his current contract in the role, it is worth reflecting on the degree to which he has succeeded, either deliberately or coincidentally, in growing the powers of the regulator.

What is undeniable is that Medcraft has been one of the more proactive people to have chaired ASIC and that he has succeeded in utilising factors such as the Future of Financial Advice (FOFA) changes, the Financial System Inquiry (FSI) and sundry parliamentary committees to further his agenda.

Perhaps the greatest change to ASIC to occur under Medcraft's chairmanship is a discernible shift from the regulator being reactive to proactive — from being the policeman who comes along and cleans up after the accident to one which seeks, where it can, to prevent those accidents from actually occurring.

But the ability of ASIC to prevent accidents before they occur arguably requires a product intervention power — something which was recommended in the context of the FSI, but something which has caused a number of industry commentators to express their concern.

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That concern is based in large part on the degree to which, armed with such a power, ASIC could become a market inhibitor and market disruptor — something which Medcraft has been at pains to discount.

In a recent speech to the Banking and Financial Law Association, the ASIC chairman sought to portray ASIC's access to a product intervention power as something which it would use in moderation.

According to Medcraft, ASIC thinks that such a power would not stifle innovation that has a positive impact on consumers and that the actual banning of products would be very rare and only occur in the most extreme circumstances.

"Both industry and regulators have a common interest in seeing innovation that fosters investor and financial consumer trust and confidence — innovation that helps investors, but does not harm them," he argued.

Medcraft claimed most interventions would likely fall well short of product banning.

"For example, we might be able to require amendments to marketing materials, or additional warnings. In more extreme cases, we might be able to require a change in the way a product is distributed or, in rare cases, ban a particular product feature."

What the ASIC chairman did not say but what is widely recognised in the financial services is sector is that the degree to which the regulator would ever exercise its intervention power would be dictated in large measure on the degree to which its personnel had the ability to recognise problems before they occurred.

The simple facts of the matter are that if ASIC has, over the past decade, appeared to be the policeman who cleans up after the accident, that impression is owed in large part to its inability to readily identify those products which were likely to crash and burn.

Another element also arises with respect to ASIC's possession of a product intervention power — the user-pays funding model which has been so assiduously pursued by Medcraft during his time in office.

At first blush there is much to recommend a user-pays approach to funding a regulator but there are those who will have concerns about a policeman being funded by the very entities he is meant to police and the perceptions which might arise.

Those, including Government ministers, who are in favour of the industry funding model for ASIC might care to consider how the public might view a regulator's failure to ban a product produced by a major institution if that company also happens to be a major regulatory funding source.

Sometimes there are good reasons to separate church and state.