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Fines as a result of enforcement action should be used to cover ASIC’s expenses, says CPA Australia.
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ASIC’s ‘outdated funding model penalises compliant SMEs’
24 November 2022
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11 minute read
The outdated funding model used by ASIC penalises compliant SMEs for mistakes made by the big end of town, says CPA Australia.
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In its submission to the Treasury review of ASIC’s industry funding model (IFM), CPA Australia recommended changes to ensure SMEs no longer had to pay for enforcement activity undertaken by the regulator against larger companies previously part of the sector.
“The retrospective nature of the IFM results in the current participants, in a given sector, being levied for past regulatory and enforcement activities that covered participants who may or have been unlicensed, unregulated or may no longer be part of the sector,” said CPA Australia’s executive general manager, policy and advocacy Gary Pflugrath in its submission.
“That is, the IFM does not reflect the current composition of the sector and its participants who make financial contributions to it.”
Dr Pflugrath said an example of those that cost ASIC money in enforcement but did not contribute to covering the expenses was the financial advice sector.
“The majority of the large institutional Australian Financial Services (AFS) licensees have ceased to provide retail financial advice yet continue to be subject to historical enforcement activities,” he said.
“The costs of these historical enforcement activities are borne by the remaining AFS licensees who are predominantly small to medium sized businesses.”
“The cost of enforcement activity against unlicensed operators appears to be borne by those who are appropriately licensed, which is arguably inconsistent with Section 10(4) of the ASIC Supervisory Cost Recovery Levy (Collection) Act 2017.”
The rise in regulatory and historical enforcement expenses across several sectors, in particular the financial advice sector, meant that compliant, levy-paying companies were required to stump up additional funds to cover the expenses due to the “considerable reduction in the number of participants paying the ASIC levy”, said Dr Pflugrath.
To ensure SMEs were not responsible for footing the bill for ASIC’s enforcement of firms no longer within their sector, CPA Australia recommended ASIC should separate its enforcement costs from its business-as-usual expenses (BAU).
Dr Pflugrath said by splitting its expenses the regulator would be able to recover its enforcement costs from the entities to which that activity was directly related, easing the burden on still-regulated businesses in the sector, while funds earned from the levy could be used to cover BAU expenses.
“All proceeds from enforcement action, including fines, civil and criminal penalties, should be allocated to the ASIC Enforcement Special Account and attributed to the relevant sector to offset the enforcement costs,” he said.
“The cost of regulating unlicensed or unregulated activities relating to entities that are no longer regulated entities should be recovered from them, where possible, and not from regulated sub-sectors.”
As part of its recommended overhaul to the funding model, CPA Australia also called for greater transparency and greater budgeting accountability by the regulator.
“The lack of transparency with respect to these costs means that industry participants may be covering some general and administrative costs that are unrelated to ASIC’s regulatory and oversight functions,” said Dr Pflugrath.
“The significant delays between ASIC levy estimates being provided and the final levies being announced each year, coupled with the significant variations between the estimated levies and final levies charged, makes it extremely difficult for participants to accurately budget for their ASIC levies and to set adequate fees for their clients to recoup theses costs.”
CPA Australia also called for a review of how ASIC attributes its costs, while additionally recommending a forward-looking annual levy forecast based on an expected budget that would allow businesses to accommodate regulatory costs.
“A review by the Australian National Audit Office (ANAO) on how ASIC allocates costs between sectors and sub-sectors, the steps ASIC takes to ensure its regulatory activities are efficient and cost-effective, and how ASIC is held to account to ensure its regulatory activities are efficient and cost-effective.”
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