A lawyer who worked for the Australian Securities & Investments Commission has told the Senate how he was under pressure to amend laws in favour of the giants of the financial services industry, laws which were against the interests of investors and consumers.
In explosive evidence before the Senate Inquiry into the Performance of ASIC, the lawyer James Wheeldon described the corporate regulator as tainted by corruption. He left in disgust in 2005 after his advice on fee disclosure was abandoned and he was asked to work under the instruction of a lawyer on secondment from the National Australia Bank’s wealth management operation, MLC.
Mr Wheeldon said the MLC lawyer Grant Jones was lobbying within ASIC to grant a special exemption (or class order) which would benefit MLC and appease industry lobbyists from the Financial Services Council. Mr Jones even helped draft the regulator’s response to an application for the exemption.
The evidence from Mr Wheeldon contradicts statements given by ASIC chairman Greg Medcraft before the inquiry on March 28.
Mr Medcraft had been asked what probity structures the regulator had in place for people from outside firms working on secondment.
“We are very careful. If we do a secondment, clearly we have to be sure that they are not into an area where they are regulating their own firm, for example. We can provide you with details on that as well,” said Mr Medcraft.
Mr Medcraft’s testimony was immediately supported by ASIC commissioner Peter Kell: “There are confidentiality agreements that people have to sign that formalise those requirements.
After studying law in the US, Mr Wheeldon spent four years working in the mergers and acquisitions group in the New York City office of an international law firm. In 2004, he returned to Australia and joined ASIC’s Regulatory Policy Branch, or RPB.
On Wednesday ASIC issued a statement rejecting Wheeldon’s claims. “We reject completely comments made today under parliamentary privilege by a former employee Mr James Wheeldon about our granting of relief in relation to generic super fund calculators,” it said.
Shortly after joining ASIC, said Mr Wheeldon, the then the head of RPB, Mark Adams, assigned him to a group of lawyers who were tasked with responding to an application for relief submitted by IFSA, the Investment and Financial Services Association (since renamed the Financial Services Council).
IFSA was the peak lobby group for Australia’s financial services businesses and is presently leading the charge for relaxation of the FOFA laws.
In the lead up to the introduction of “Super Choice” in 2005, a key focus of IFSA’s lobbying efforts was online superannuation calculators.
“In a nutshell, the Corporations Act required online super calculators to have a “reasonable basis” for the outputs they produced,” said Mr Wheeldon.
“Starting in 2004, IFSA aggressively lobbied ASIC to issue a Class Order that would amend the Corporations Act so that IFSA’s members could offer online calculators that did not comply with the Act’s “reasonable basis for advice” standard. This would allow IFSA members to use online calculators as marketing tools, rather than as reasonable educational tools and would also relieve IFSA members from the obligation to include fees in their online calculators.”
Mr Wheeldon told the Senate the relief IFSA sought would, in the words of a lawyer from ASIC’s consumer protection directorate, allow the “bad end of the market” to “spruik projections that they would not be permitted to promote on paper or verbally”.comment
“On the other hand of course, the amendment would deliver IFSA members a valuable commercial benefit.”
ASIC has strict procedures for reviewing relief applications, as set out in what was then known as Policy Statement 51: Applications for relief. PS51 requires applicants for relief to submit a formal application and pay a fee. It requires ASIC to undertake a strict analysis of the regulatory detriment that would flow from any grant of relief.
It also says that ASIC can only issue class order relief after public consultation, unless the underlying policy is well-settled.
“ASIC does not have the legal authority to grant relief that overturns the intended effect of an act of Parliament,” said Mr Wheeldon. “Any ordinary person or business who applies to ASIC for relief would be required to comply with PS51.
“However the rules that apply to everyone else did not apply to IFSA’s application for calculator relief. ASIC never required IFSA to submit a formal relief application or, to the best of my knowledge, pay the mandatory application fee.”
Instead, IFSA was allowed to submit its application for relief in the form of personally addressed letters to senior ASIC staff. “There was a “Dear Ian” letter in August 2004, addressed to Mr Ian Johnston of ASIC’s Financial Services Regulation directorate.
“And there was a “Dear Mark” letter, addressed to Mark Adams of RPB in February 2005. These letters did not even pretend to comply with the requirements of PS51.”
Nonetheless, according to Mr Wheeldon’s testimony, in late 2004 Mark Adams established a team of RPB lawyers to respond to IFSA’s request for relief.
Mr Wheeldon said that On 8 November 2004, Mr Adams sent an email to a number of senior ASIC staff, including John Price, who is now a Commissioner of ASIC.
“In that email, Mr Adams stated that his intention was to “pre-empt” IFSA’s request for calculator relief. Mr Adams said that, based on IFSA’s lobbying to date, he thought IFSA was “likely to seek” Class Order relief exempting online super calculators from the reasonable basis standard, and thus Mr Adams had set up a team of five lawyers to progress IFSA’s anticipated request,” said Mr Wheeldon.
“Mr Adams tasked me with preparing a Class Order that would exempt online calculators from the Corporations Act. He instructed me to start drafting this relief instrument, despite the fact that no formal relief application had been submitted.”
Mr Wheeldon said that, in his opinion as a lawyer, the intent of Parliament was clear and that, as a matter of law, ASIC did not have the authority to grant IFSA’s request for relief – and certainly not without first undertaking public consultation. Further, it was crystal clear that the relief would cause significant regulatory detriment in the form of poorer fee disclosure to superannuation investors.
“On more than one occasion, however, Mr Adams explicitly told me that ASIC had to produce a result for IFSA, and that if we didn’t, IFSA would bring pressure to bear on the Commissioners of ASIC, and that he didn’t want anyone to be able to say that the RPB was responsible for any delay in giving IFSA what it had asked for.
“The message was clear: ASIC could not say no to IFSA.”
Complicating matters further, said Mr Wheeldon, was the fact that Mr Adams required him to report to Mr Grant Jones, a more senior lawyer who had also been assigned by Mr Adams to the “calculator relief” project.
“But Grant Jones was not an ASIC employee. He was employed by MLC, the wealth management division of National Australia Bank. MLC was an IFSA member.”
reMr Wheeldon said that Jones was at ASIC on a secondment from MLC. On 5 November 2004, Mr Jones told Mr Adams, in the presence of Mr Wheeldon, that Mr Jones had, as an MLC employee, helped draft IFSA’s letters to ASIC lobbying for calculator relief.
“Mr Jones specifically told Mr Adams that he thought he had a conflict of interest. Despite this disclosure, Mr Adams kept Mr Jones on the “calculator relief” team,” said Mr Wheeldon. Mr Jones, he said, was an enthusiastic advocate within ASIC for the relief his employer sought.
“He amended ASIC’s internal issues papers on calculator relief to advance his employer’s interests. He drafted emails to IFSA on behalf of ASIC. He actively lobbied ASIC lawyers, including me, to support changing the law to benefit his employer. He did this with the full knowledge of Mark Adams,” said Mr Wheeldon.
“I considered this to be highly improper and, after considerable deliberation, I complained to a variety of senior ASIC staff, including among others Malcolm Rodgers, the head of Regulation, and Brendan Byrne, ASIC’s General Counsel.
“Their response was, in essence, “how dare you suggest we have done anything improper”.
In early April 2005, Mr Wheeldon left ASIC, without giving notice. He said he thought Mr Adams’ instructions to him were improper and unlawful, and that he could “no longer obey them in good conscience”.
On 15 June 2005, ASIC issued a Class Order granting IFSA and its members exactly what IFSA had asked for. The explanatory statement to the Class Order stated that ASIC did not undertake public consultation prior to granting relief because the relief was of a “minor and machinery nature”.
“In my professional opinion, the issuance of this Class Order was tainted by corruption, and the explanatory statement was deliberately misleading and contemptuous of Parliament,” said Mr Wheeldon.
“I think that the Australian people would be dismayed and outraged if they knew the truth about how ASIC has made policy that affects the superannuation savings of working Australians.”
ASIC officers have consistently denied that the regulator does favours for big business.