Has ASIC got too big for its own good?

Stephen Long’s story last Monday night on the ABC’s Four Corners beautifully illustrated the human cost of financial misconduct, as retirees and widows described the pain of having lost their super funds and savings in dodgy financial schemes.

It is yet another in the heartbreaking tales of ordinary people coming to grief in the wash-up of the global financial crisis, as in the USA and in the United Kingdom.

The difference is that politicians and regulators in the UK and USA are doing something about it.

The regulator responsible in the cases documented by Four Corners is the Australian Securities and Investments Commission (ASIC) whose chairman Greg Medcraft did not exactly cover himself with glory when questioned by Long.

After professing ignorance of information presented by the reporter (and there is absolutely no reason why Medcraft should be across all the details) he tried to shift the blame to his predecessor Tony D’Aloisio for failing to answer questions posed by an investor burnt in the collapse of Prime Trust.

To its credit, ASIC is bringing the Prime Trust case to court but, in the meantime, funds are frozen and retirees are forced back to work to make up for the losses.

In his interview, Medcraft shrugged his shoulders and claimed that preventing financial misconduct of this sort wasn’t actually ASIC’s problem, and stated that the regulation of the so-called shadow banking sector was deficient. This was not, however, the view of the Reserve Bank of Australia, which last year, denied there was a (big) shadow banking problem and, if there was, it was ASIC’s problem anyway.

There are layers of problems (and potential solutions) here, but the issues of consumer protection against financial misconduct, raised by Four Corners, have been aggressively tackled elsewhere.

In the UK, with the new Financial Conduct Authority and in the United States with the new Consumer Financial Protection Bureau it has been recognised that a dual track is needed, more intrusive regulation to protect consumers from ever more complex financial products (and their spruikers) and better education for consumers.

Even more disclosure is not the answer. It is obvious that unscrupulous firms can hide details, for example about exorbitant intercompany management fees, in reams of fine print.

The front line for consumer protection in the financial sphere in Australia is ASIC through its MoneySmart website, which “offer(s) you tips & tools to help you make the most of your money”. While well meaning, such as giving you advice to “pay off your loans and credit cards faster” (hardly rocket science) and to consider working longer if your super has been depleted by the GFC (hardly compassionate) it is a mishmash of different “tools and calculators”.

The information given by the calculators is, at times, misleading and, sometimes, downright wrong.

Consider the following screen from the MoneySmart superannuation calculator of a hypothetical 25-year-old earning $50,000 per year and his/her super balance at retirement.

The calculator gives a precise balance of $402,776 – while also pointing out it is just an estimated projection. Now the only thing we do know for certain is that the balance is highly unlikely to be precisely $402,776 (so-called false precision). In fact, the only thing we do know for certain is that we don’t know what the balance will be because there are so many uncertainties.

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