Australia's corporate watchdog has identified superannuation growth, financial system complexity and the need to be a front-foot regulator as the three key issues it faces this decade.
ASIC chairman Greg Medcraft said expected growth in superannuation savings was a significant regulatory challenge for the corporate regulator. "Superannuation is expected to grow to $3 trillion over the next decade and $5 trillion over the [following decade]," Medcraft told an Australian Institute of Company Directors (AICD) audience in Melbourne this week.
"It will grow at twice the rate of the economy. This will increase ASIC's regulatory perimeter as more investors come into the system and money invested increases."
He said superannuation growth would flow through to financial advisers, superannuation trustees, investment managers, custodians, research houses, credit rating agencies, auditors and accountants. "They all play roles in supporting investors in superannuation funds and are all regulated by ASIC," he said.
There will be greater need for consumer education and financial advice as baby-boomers retire and switch to more conservative assets. "A larger financial system will invariably generate more complaints and breaches," he said.
He said superannuation growth would have a significant impact on ASIC resources. "With more stakeholders and investment products, ASIC's workload will increase. It will be a key challenge to ensure our regulation is sufficient and remains effective, so that overall risk in the system is contained," he said.
Growing complexity in the financial system across products, information channels and markets also increases regulatory risks. Medcraft nominated cash and synthetic exchange-traded funds, contracts-for-difference, hybrids, credit-enhanced asset-backed securities, credit-default swaps, equity-default swaps and investments in hedge funds and private equity as examples of complex financial products.
Greater scope to invest overseas in frontier or emerging markets is another risk. "More complex products means greater risk and greater potential losses for Australian investors," Medcraft said.
"The increased risks in complex products are not just faced by retail investors. The GFC (global financial crisis) provided clear examples of non-retail investors - such as universities, councils and endowment funds - that incurred severe losses from investing in structured credit instruments they did not understand."
Technology complexity and the potential for cybercrime would add to financial system risks over the coming decade, he said. "Trades have moved from taking one or two seconds to milliseconds to microseconds. High-frequency traders using this new technology have added to exponential increases in global order books ... ASIC needs to keep pace with these rapid changes in technology to ensure markets are fair and efficient and investors get a fair price when trading on an exchange," he said.
Technological advances had led to more crime moving online and more elaborate financial scams based around cold-calling for investment products, he said. "The ever-growing range of products and investor operations means the regulator needs to be much more vigilant and proactive. This process of increased complexity is likely to continue in the future, especially while equity markets remain volatile and investors look for yield," he said.
ASIC's third challenge around proactivity is arguably its most important. Medcraft said: "Financial markets face heightened risk, which means regulators need to be on the front foot. Rather than being reactive and arriving at the scene of the accident, regulators need to be cops on the beat, helping prevent and deter accidents from happening.
"This is a major challenge for ASIC, particularly with our limited resources."
On behalf of the AICD, Tony Featherstone facilitated an audience discussion with Greg Medcraft at the Melbourne event.
