A representative from ASIC revealed the corporate regulator would prefer to move quicker on identifying and mitigating fraudulent financial products, but is held back by the steps inherent in its processes.
Speaking at a session entitled ‘How to pick a fraud’, held as part of the Professional Planner Digital Researcher Forum 2020 in Sydney yesterday, ASIC senior executive leader of investment managers, Rhys Bollen, outlined some of the work his team was undertaking to curb products that aren’t true-to-label. When asked why ASIC can’t move quicker when it identifies wrongdoing, Bollen said it was a “good question”.
“I suspect we’re never as quick as we’d like to be or some others would like [us] to be,” he explained. “That’s the nature of being a regulator, we do have to follow due process. The firms that we might be concerned about, we do have to give them an opportunity to respond and the court process – as it should – requires evidence and proper consideration.”
Bollen outlined three recent campaigns ASCI is undertaking to catch products that are fraudulent or not true-to-label.
The first involves bank alternatives; that is, products being advertised as ‘term deposits’ or ‘substitutes’. “Some even use google or other services to make sure their products came up when you search for a term deposit or bank account,” Bollen said, while adding that the campaign, which started in May, and has already resulted in several firms being forced to adjust their disclosure.
The second campaign involves companies promoting high-yield products with unbalanced comparisons. “We saw property and mortgage funds offering same day, 24 hour withdrawals,” he noted. “It’s not a realistic impression to give a client.”
The third centred on ‘true-to-label’ surveillance and looked at 37 managed funds totalling $21 billion in assets, which included ASIC taking out injunctions and levying civil penalties against Mayfair 101 and Mayfair Platinum for misleading and deceptive promotion of its products.
“Any financial product put to Australian consumers should be true to label,” Bollen told the panel. “It should actually do what it says it does.”
Danger signs and ambulances
Bollen revealed some of the red flags ASIC was looking for when identifying fraudulent products. The kind of full-page advertising Mayfair group sponsored in the Australian Financial Review for a concerted period of time tends to stand out, he explained. “Products that have a regular stream of full-page adverts and billboards by the roadside at the airport would be of interest.”
Another indicator is an aversion to professional collaboration. “Products sold directly to retail that directly bypass advisers, researchers, platforms and the like is another one that we might look out for,” Bollen continued.
Outsized commissions and fishy referral arrangements are also on the radar, he explained, as are comparisons to bank accounts, “because that’s a very unique type of product and anything that’s not a bank account ought not be sold as equivalent to a bank account”.
Bollen was joined on the panel by UNSW professor of commercial law and regulation, Pamela Hanrahan, and DPM Financial Services consultant, Dominic McCormick. Hanrahan took issue with ASIC’s focus on mislabelling, and said making sure “if it’s paint it says paint” only goes so far because the audience often don’t understand the difference between products.
Of greater importance, she explained, is the failure of the government to adjust the definitions of wholesale and retail clients – which are based on 20 year old benchmarks and, as Bollen explained to Professional Planner, increase ASIC’s workload. This has left investors who meet the threshold for being ‘wholesale’ exposed to being marketed products which have “the added glamour, if you like, as being ‘sophisticated’,” she said.
The problem is as prevalent as it is urgent, Hanrahan argued.
“I’ve said for years there’s only two ways you can make money in financial products; one is innovation, the other is obfuscation. What we’re seeing at the moment is a lot of products that really obfuscate what they are,” she said.
Despite being a noted critic of ASIC, Hanrahan believes the regulator should have more sway when it comes to policy formulation on issues like the outdated investor definitions.
“I think we’re in a really dangerous place at the moment… some members of the coalition are arguing that ASIC out to get out of the policy space or that it ought not to be about agitating for reform,” she said.
ASIC has more to offer than simply functioning as the “the ambulance at the bottom of the cliff”, Hanrahan continued. “I think one of the difficulties we’ve had over the last ten years is actually that the regulatory agencies haven’t been listened to enough.”
Role of researchers
As an investment research consultant, McCormick said it was incumbent on research houses to look into the bad products as often as the good ones, which would provide “broad benefits” to consumers and the investment community.
By doing so, McCormick argued, researchers could also demonstrate that they’re more than just ‘pay to play’ providers.
“A lot of the researchers think that their job is to avoid some of these more dodgy products,” he said. “But I think it would help their reputation and help the perception that their value is being added if they call some of these products out.”