Fundamental aspects of the Federal Government's proposed industry funding model for ASIC's regulatory activities with respect to registered liquidators warrant serious consideration.
In November 2016, the Federal Government published a further consultation paper on the Proposed Industry Funding Model for the Australian Securities and Investments Commission (Funding Model). The formal consultation period for the Funding Model, which was prompted by the Financial System Inquiry's recommendation for ASIC's regulatory activities to be funded by industry, ended on 16 December 2016. The Government has committed to the passage of legislation for the Funding Model in July 2017, with the first levies due from registered liquidators in February 2019.
There is a significant disparity in the cost of ASIC's regulatory activities between the 6 different sectors of the financial system it regulates. Acknowledging this, the Funding Model proposes that each sector fund its own regulation.
A self-funding model has merit and has been successfully adopted by regulators in other comparable jurisdictions. The U.S. Trustee Service, for example, is funded predominantly by filing fees and the quarterly fee paid by chapter 11 debtors. However, the Funding Model, insofar as it concerns registered liquidators, is, in its current form, not appropriately adapted to achieving its stated goal of ensuring that the costs of regulation are proportionately borne by those creating the need for it.
The Funding Model proposes that ASIC's estimated $8.5 million annual cost of regulating registered liquidators be borne by the 710 currently registered liquidators in 2017-18 by way of a fixed levy of $5,000 plus a graduated levy based on the number of appointments compared to the total number of appointments industry wide (estimated to be $550 per appointment). In 2018-19, consideration will be given to moving to an "assets realised" levy based on information provided to ASIC in annual administration returns lodged by registered liquidators. The levy is in addition to registration fees which are proposed to increase from $387 to $3,500 (with a renewal fee of $1,700 every 3 years).
Number of appointments levy metric
The proposed levy in 2017-18 is a tiering based on the number of external administration appointments, including the appointment of a registered liquidator as a controller, provisional liquidator, liquidator, voluntary administrator, or administrator of a deed of company arrangement. The number of appointments is to be adjusted, relevantly, so that where:
- the company is under two or more types of external administration, this is counted as two separate external administration appointments;
- a registered liquidator is replaced by a registered liquidator from another firm, this is counted as an external administration appointment by both liquidators; and
- the appointment of a registered liquidator from another firm as a special purpose liquidator is counted as an external administration appointment by both liquidators.
This levy metric implies that the more appointments undertaken or the more external administrators appointed to a company from different firms, the higher the level of regulatory oversight required by ASIC and the greater the resources required by ASIC.
There is no necessary correlation between the number of appointments and the risk of misconduct. As such, this metric does not fairly distribute the cost of regulation and is likely to adversely impact upon registered liquidators who operate in the high-volume, low margin sector of the market and to deter registered liquidators from taking appointments to assetless companies.
Assets realised levy metric
The proposed levy in 2018-19 is a tiering on the basis of the value of assets realised. The rationale for this metric is that the higher the value of assets realised, the greater the risk and need for regulatory oversight. This may be so if risk is measured by the gravity of the consequence of wrongdoing. However, if high-value realisations are conducted by larger firms with sophisticated compliance systems designed to minimise the risk of undetected misconduct, an assets realised apportionment will likely result in the costs of regulation being borne by those registered liquidators who least create the need for it.
A fair and sustainable industry funding model would see a balance between the interest all registered liquidators have in the efficient regulation of the corporate sector and the costs of regulation being borne by those "high-risk" registered liquidators who are conflicted, incompetent, or charge excessive fees. A compelling case might be made for the recovery of (at least) part of the costs of ASIC's enforcement activities through the imposition of fines. Such an approach would see unregistered pre-insolvency advisers bear some of the regulatory burden.
Further options in addition to those discussed in the Funding Model should be considered, with a view to arriving at a model that supports trust and confidence in the profession without placing an undue burden on all insolvency practitioners, who already fund self-regulation.