Australian Regulatory Compliance Review

The links between bonuses, ethics and compliance

What would you do if you were employed on particular terms ($1 salary plus a performance bonus) and later asked to forego your pay? Would it make any difference if you worked in a company that had to be bailed out by the government?

The payment of bonuses to AIG executives has received much publicity. So it was very interesting to read the public letter from Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.: Dear AIG: I Quit!

The misalignment of compensation and its effect on corporate ethics and compliance is the subject of an article (Risky Business) on the events at Countrywide Financial Corporation, one of the largest US Sub-prime lenders. 

The CEO's pay package. Mozilo took home more than $140 million in 2005 and more than $100 million in 2006 even as the share price started to tank, according to a Corporate Library report. It wasn't only that he was among the most highly paid executives in its surveys. He also was guaranteed both a pay raise each year and a hefty stock option grant. Where his compensation was tied to performance, it wasn't the long-term sort that governance consultants recommend; his bonus was calculated in part by the rise in the stock price from the previous year...

Managers' bonuses were based on revenue, and in recent years Countrywide's big revenue producer was subprime mortgages. So they had a special incentive to favor that market. Loan officers did, too, because they were paid larger commissions for pushing these loans.

Why were they especially lucrative? Borrowers were charged higher rates for them than for prime mortgages because the loans were riskier. And Countrywide, based in Calabasas, California, sold these loans for a nice profit to investment banks like Merrill, which in turn bundled and sold them as CDOs. Between 2004 and 2007, Countrywide originated $150 billion in subprime mortgages-the most in the industry-helping vault it into the Fortune 100.

It's clear that ethics and compliance will suffer if performance bonuses are linked to the wrong KPI's.

New Australian Consumer Law: national unfair contracts law

Assistant Treasurer Chris Bowen has announced that the national consumer protection law which was agreed between the Commonwealth and the states last year (see here), will be fast tracked with a bill to be introduced by June 2009 and commencement on 1 January 2010.

Proposals for the law are outlined in a consultation paper (An Australian Consumer Law: Fair markets — Confident consumers). Submissions on the Australian Consumer Law are due by the 17th March 2009.

The consultation paper follows recommendations from a Productivity Commission review that there be a new consumer policy framework, comprising a single national consumer law and streamlined enforcement arrangements.

The reforms have three key elements:

• the development of a consumer law to be applied both nationally and in each State and Territory, which is based on the existing consumer protection provisions of the Trade Practices Act 1974, and which includes a new national provision regulating unfair contract terms, new enforcement powers and, where agreed, changes based on best practice in state and territory laws;
• the implementation of a new national product safety regulatory and enforcement framework, as part of the national consumer law; and
• the development of enhanced enforcement cooperation and information sharing mechanisms between national and state and territory regulatory agencies.

The purpose of the consultation paper is to:

• explain how the national consumer law will be developed;
• explain the nature and scope of COAG’s agreed reforms to create the national consumer law and, in some limited circumstances, seek views on specific aspects of those reforms; and
• seek views and explore options for augmentations and modifications to existing generic consumer protections which are based on best practice in existing state and territory laws.

Amongst other things, the law will target unfair terms in standard form contracts (such as those used for utilities, mobile phones and bank accounts). A contract term will be unfair if it charges consumers for breaches that do not reflect reasonable costs.

The new Australian Consumer Law will allow consumers and the ACCC to take action against contract terms that cause detriment or a substantial likelihood of detriment to consumers.

The legislative package will also include new powers for the Australian Competition and Consumer Commission, including:

• Civil pecuniary penalties;
• Disqualification orders;
• Infringement notices
• Substantiation notices;
• Public warning notices; and
• Court orders to seek redress for consumers who aren't party to a particular action.

The Minister also proposed changing the name of the Trade Practices Act to the 'Competition and Consumer Act' to better reflect the protections the law gives to Australian consumers.

Financial services implications

The Government has provided a commitment to maintain consistency between the Australian Consumer Law’s generic provisions and the consumer (or investor) protection provisions in credit and financial services laws, to the extent that it is practicable to do so.

The financial services laws are currently the subject of a reform process including the establishment of uniform national laws for the regulation of consumer credit.

Nevertheless there will be an overlap between the 2 sets of laws, especially in the area of unfair contracts.

Unfair contract terms are those that cause a significant imbalance in the parties’ rights and obligations arising under a contract and are not reasonably necessary to protect the legitimate business interests of the supplier. They are prevalent in standard form contracts.

The consultation paper lists banking and financial services, including credit agreements, as examples of contracts that may be affected.

Particular unfair terms that will be banned include:

• Unreasonable flat/fixed early termination fees and those requiring the paying out of the contract; and
• Terms requiring consumers to pay more than suppliers’ reasonable enforcement costs reasonably incurred.

US regulators and Madoff

The US Securities and Exchange Commission is being quizzed over its role in Madoff's Ponzi scheme.

Here's an excerpt from the hearing by the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises

ASIC may be in for similar questions in respect of Storm Financial.

New regime proposed for Third Sector: charities and not-for-profit organisations

The Senate Standing Committee on Economics has released a report on charities and not-for-profit organisations.

The Committee's recommendations include:

• that the Government establish a unit within the Department of Prime Minister and Cabinet specifically to manage issues arising for Not-For-Profit Organisations. The unit should report to a Minister for the Third Sector;
• that there be a single independent national regulator for Not-For-Profit Organisations;
• that the Australian National Regulator for Not-For-Profit Organisations should have similar functions to regulators overseas, and particularly in the UK, including a compulsory Register for Not-For-Profit Organisations;
• that a single, mandatory, specialist legal structure be adopted for Not-For-Profit Organisations;
• that a National Fundraising Act be developed.

Superannuation clearing house discussion paper

Senator the Nick Sherry, Minister for Superannuation and Corporate Law, has announced the release of a two-part discussion paper on the implementation of the Government's superannuation clearing house measure and possible initiatives to reduce the number of lost super accounts.

The clearing house was proposed in the last Federal Budget to assist in managing employers' obligations to provide superannuation choice to employees. An employer's superannuation guarantee (SG) obligations would be discharged once the required amount of contributions was paid on time to the clearing house.

This facility will be offered free of charge by the Australian Government to small businesses with fewer than 20 employees and on a fee‑for‑service basis to larger businesses.

The issues discussed in the first part of the paper include the division of responsibilities between employers and the clearing house in relation to Superannuation Guarantee and choice of fund, whether the clearing house facility should be contracted to a single or multiple providers, and the regulatory framework which will apply to the clearing house.

The second part of the discussion paper canvasses possible initiatives to address the problem of lost members, including a proposal to automatically consolidate lost accounts with an active account where one can be identified for the member.

Submissions close on 19 December 2008

Make sure you find out the bad news first: developing a compliance framework

Some of the boards of major companies have been criticised recently for being unaware of the extent of significant problems within their organisation. Whilst boards cannot be expected to know the minutiae of daily operations, a culture whereby bad news is kept from the board is dangerous.

This is especially dangerous if a legal offence has been committed and the organisation is either legally obliged to report it or an extra penalty is payable if the breach was not rectified.

What can be done to make sure that material information is passed on to the board? The starting point is explaining to staff the importance of information being reported on.

Do you have a compliance framework that can be quickly explained to staff ? I had a go at explaining a system visually and you can see my efforts in a video (6 mins 40 seconds). Let me know what you think.

Designing a compliance framework from David Jacobson on Vimeo.

Removal of same-sex discrimination from Commonwealth laws

Attorney-General Robert McClelland has introduced into Parliament the Same-Sex Relationships (Equal Treatment In Commonwealth Laws — General Law Reform) Bill 2008, containing the second stage of legislation removing same-sex discrimination from a range of Commonwealth laws.

The amendments will remove discrimination in areas including social security, taxation, Medicare, veteran’s affairs, workers’ compensation, and educational assistance.

In areas such as social security and taxation, the reforms will be phased in to allow time for couples to adjust their finances and for administrative arrangements to be implemented.

All changes are expected to be implemented by mid-2009.

Earlier this year, the Government introduced legislation to end same-sex discrimination in Acts governing Commonwealth superannuation schemes.

The Bill will amend the following Commonwealth Acts to achieve this purpose:

Agriculture, Fisheries and Forestry

-        Australian Meat and Live‑stock Industry Act 1997

-        Farm Household Support Act 1992

Attorney‑General

-        Acts Interpretation Act 1901

-        Administrative Decisions (Judicial Review) Act 1977

-        Age Discrimination Act 2004

-        Australian Federal Police Act 1979

-        Bankruptcy Act 1966

-        Crimes Act 1914

-        Crimes (Superannuation Benefits) Act 1989

-        Customs Act 1901

-        High Court Justices (Long Leave Payments) Act 1979

-        Judges (Long Leave Payments) Act 1979

-        Passenger Movement Charge Collection Act 1978

-        Proceeds of Crime Act 2002

-        Service and Execution of Process Act 1992

-        Sex Discrimination Act 1984

-        Witness Protection Act 1994

Broadband, Communications and the Digital Economy

-        Australian Postal Corporation Act 1989

-        Broadcasting Services Act 1992

-        Telstra Corporation Act 1991

Defence

-        Defence Force (Home Loans Assistance) Act 1990

-        Defence (Parliamentary Candidates) Act 1969

-        Royal Australian Air Force Veterans’ Residences Act 1953

Education, Employment and Workplace Relations

-        Education Services for Overseas Students Act 2000

-        Higher Education Support Act 2003

-        Judicial and Statutory Officers (Remuneration and Allowances) Act 1984

-        Safety, Rehabilitation and Compensation Act 1988

-        Seafarers Rehabilitation and Compensation Act 1992

-        Student Assistance Act 1973

Families, Housing, Community Services and Indigenous Affairs

-        A New Tax System (Family Assistance) Act 1999

-        A New Tax System (Family Assistance) (Administration) Act 1999

-        Aboriginal Land Grant ( Jervis Bay Territory) Act 1986

-        Corporations (Aboriginal and Torres Strait Islander) Act 2006

-        Social Security Act 1991

Finance and Deregulation          

-        Commonwealth Electoral Act 1918

-        Medibank Private Sale Act 2006

-        Members of Parliament ( Life Gold Pass) Act 2002

-        Parliamentary Entitlements Act 1990

-        Superannuation Act 1976

Foreign Affairs and Trade             

-        Australian Passports Act 2005

-        Export Market Development Grants Act 1997

-        Trade Representatives Act 1933

Health and Ageing

-        Aged Care Act 1997

-        Health Insurance Act 1973   

-        National Health Act 1953

-        Prohibition of Human Cloning for Reproduction Act 2002

-        Research Involving Human Embryos Act 2002

Immigration and Citizenship

-        Australian Citizenship Act 2007

-        Immigration (Education) Act 1971

-        Immigration (Guardianship of Children) Act 1946

-        Migration Act 1958

Infrastructure, Transport, Regional Development and Local Government

-        Airports Act 1996

-        Civil Aviation (Carriers’ Liability) Act 1959

-        Navigation Act 1912

Innovation, Industry, Science and Research

-        Pooled Development Funds Act 1992

Prime Minister and Cabinet

-        Privacy Act 1988

Treasury

-        A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Act 1999

-        Corporations Act 2001

-        Fringe Benefits Tax Assessment Act 1986   

-        Financial Sector (Shareholdings) Act 1998

-        Foreign Acquisitions and Takeovers Act 1975

-        Income Tax Assessment Act 1936

-        Income Tax Assessment Act 1997   

-        Insurance Acquisitions and Takeovers Act 1991

-        Life Insurance Act 1995

Veterans’ Affairs

-        Defence Service Homes Act 1918

-        Military Rehabilitation and Compensation Act 2004

-        Veterans’ Entitlements Act 1986

Harmonisation of legal systems within Australia and between Australia and New Zealand

The Commonwealth Government has responded to the House of Representatives Legal and Constitutional Affairs Committee report into the harmonisation of legal systems within Australia and between Australia and New Zealand by announcing that it will act on 22 of the 27 recommendations, including in relation to harmonisation of guardianship and succession law, evidence law, consumer protection, privacy and debt collection.

The Government does not accept the recommendations for the institution of a common currency for Australia and New Zealand and the legal harmonisation of the Australian and New Zealand telecommunications regulation frameworks.

ANZ Bank securities lending review and risk management: Opes Prime aftermath

The ANZ Bank has released the report of a Review Committee (pdf) which examined the Bank’s involvement in Securities Lending and its relationship with Broker clients including the Opes Prime group (Opes). (Business Day background)

The Review Committee found :

• the differences between Equity Finance and other types of Securities Lending were not fully understood and appreciated by most ANZ staff involved in those products.
• ANZ’s Equity Finance business should not have operated in an environment where all the risks were not fully understood and managed. The business posed unacceptable reputational and financial risks to ANZ and these were not properly identified. These risks were compounded by the lack of a proper control environment with respect to the Equity Finance business.
• Poor accountability and ‘management by committee'
• Failure to identify and act on warning signs
• Failure to report relevant issues to the Chief Executive Officer and Board
• Breaches of ANZ employee conduct policies

The weaknesses in the management and oversight of the Equity Finance business within ANZ’s Securities Lending unit meant that ANZ did not adequately identify and manage the range of risks which arose from the operation of a business of this nature. The Review Committee identified breaches of ANZ’s Code of Conduct by two employees who will leave ANZ. Six other employees were disciplined.

The Review Committee’s report has been presented to the ANZ Board which has accepted the findings and has given its full support to the remediation program. The report provided to the ANZ Board has been released today and has also been provided to the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.

The issues examined in the report are not those which caused the collapse of Brokers including Opes. Nor does the report address broader legal issues, particularly those associated with the losses incurred by the clients of Opes.

ANZ recognises that the legacy of its involvement in Equity Finance may well be with the Bank for many years through legal cases that it will continue to defend and also the impact of these issues on its reputation.

Commonwealth courts portal

The new Commonwealth courts portal features Federal Law Search which provides selected information on cases initiated in the Federal Court of Australia and in the federal law jurisdiction of the Federal Magistrates Court of Australia.

The database is updated in real time and includes all cases that have commenced since 1 January 1984.