Regulating investment complexity without stifling innovation will increasingly challenge the Australian Securities and Investments Commission (ASIC) as global financial systems undergo significant structural change.
Speaking at the Australian Shareholders’ Association (ASA) Conference, ASIC chairman Greg Medcraft committed the watchdog to addressing emerging risks to ensure confident and informed investors, and fair, efficient markets.
Globally, new rules to strengthen the banking system are imposing higher capital and liquidity requirements.
“The net effect of this is often a decreased access to debt capital and an increased cost to business. As a result, many businesses are turning to market-based financing to source their capital,” said Medcraft.
“The second driver of market-based financing is the continuing global growth of the pension and superannuation sectors – much of which is invested in debt and equity capital markets.
“The growing importance of market-based financing presents a challenge for market regulators to ensure we have the right tools and resources in place, so that debt and equity capital markets can perform their critical role in funding economic growth.
“This increase in activity in our capital markets will have a flow-on effect on financial service providers such as financial advisers, investment managers, custodians, research houses, credit rating agencies, and auditors and accountants.”
Keeping up with complexity
Medcraft added that the regulator was keeping pace with innovation-driven complexity in products, markets and technology.
“It’s a constant struggle to monitor new developments and respond in a way that doesn’t unduly restrict the benefits of innovation. However, we also need to be mindful that innovation can add complexity and risk,” he said.
The problem of complex products being mis-sold is particularly concerning to ASIC.
“It is important that investors take responsibility for their decisions. They should understand the risk–reward pay off and the concept of diversification. In this regard, investor education remains key,” warned Medcraft.
“In fact, I like to say if you don’t understand it, you shouldn’t buy it – even if your financial adviser recommends it.”
Despite the “perennial challenge” of mis-selling, Medcraft also put product providers on notice and hinted at further regulation.
“Product manufacturers and product issuers have a role to play. It’s not a sustainable business model if the customers are losing money. They need to ensure the products are appropriate for the customer and aren’t mis-sold,” he said.
“My position on this is clear: those selling complex products to unsuspecting investors need to wise up and do the right thing. They might get away with it for a while, but as we saw with the crisis, governments and courts inevitably rule in favour of investors that have been mis-sold these complex products.
“ASIC has a working group on complex products, which is currently exploring the best ways to regulate these products. This includes considering the whole of the product life cycle, not just distribution and disclosure.”
