Laying Down the Law

Wednesday, August 1, 2012 - 12:23

Once a key player on Wall Street, ASIC chairman Greg Medcraft is now reining in Australia's corporate cowboys, writes Tom Skotnicki

To the shock of his friends, the first time Greg Medcraft went to New York in the mid-1980s he stayed at the YMCA, then located in one of the worst neighbourhoods of one of the most violent cities in the world.

"I heard shotguns at night and I was genuinely scared, but it was cheap," Medcraft said. "That part of the trip was on my personal account so I went from staying in the YMCA to staying at the Waldorf Astoria (for the business component of his trip)."

Medcraft may now be a millionaire, but his sensibility will always be more akin to the average investor than a silvertail.

A little more than a year into his tenure as chairman of the Australian Securities and Investment Commission, Medcraft has been busy reshaping our key corporate watchdog.

He has been so prominent in the media in other ways that many in business may not realise he has been transforming and consolidating the operations of the commission and its nearly 2000 staff.

In the past year, the previous line- up of ASIC commissioners has largely been replaced [with the approval of the federal treasurer]. In hiring the new commissioners, there was an emphasis on broadening skill and expertise.

It has resulted in almost a total revamp of the organisation's key executives.

The government's decision in the most recent budget to provide ASIC with an extra $180 million over the next four years was a fundamental endorsement of Medcraft's performance and approach. It was a strong result after funding was frozen in 2011 (operating expenditure for 2010-11 was $385 million). However, Medcraft has already demonstrated he is not going to be a typically dour regulator.

He recently supported a suggestion made earlier this year by a member of the Takeovers Panel that the 3 per cent creep rule be revised. It was an issue on which he had no need to take a position. However, he says the rule under which a single shareholder can potentially exceed the takeover threshold of 20 per cent by buying 3 per cent of listed companies every six months without triggering a takeover bid could result in less than optimum returns for shareholders. His decision to champion the issue, which at the time was "live" because of the investments by James Packer in Echo (operator of casinos in NSW and Queensland) and by Gina Rinehart in Fairfax, was typical of his willingness to confront controversy.

ASIC is still dealing with the reverberations of the global financial crisis on investment markets. It is placing emphasis on strong regulation to ensure fair and transparent markets, investor access to information and full disclosure of risks.

However, Medcraft says it is not the job of ASIC to protect or prevent investors from taking risks, but to make sure they are informed and in some cases take action where investors are misled or likely to be disadvantaged.

Mt recently met with Medcraft in his Sydney office. He says market failures can happen on all sorts of scales and a large part of the job is educating directors, shareholders and stakeholders on their rights and responsibilities. He says not every technical breach would, or should, result in punitive action, but with the right training and greater awareness they are far less likely to happen.

His conversation is full of references to the importance of timely reminders of responsibilities to markets, not just for directors, but also the gatekeepers such as financial advisers, auditors, rating agencies and other intermediaries.

Medcraft is, of course, prepared for the inevitable question about his own role on Wall Street as the worldwide head of securitisation on behalf of the French bank Societe Generale.

As a co-founder of the American Securitisation Forum he is well-known in New York and was a key player in the development of the securitisation market, which author Michael Lewis, in his book The Big Short, claimed was instrumental in the development of the sub-prime crisis. One of the scenes described was the forum's 2007 annual convention attended by thousands of financiers and held at the Venetian Hotel in Las Vegas where Lewis said it was already apparent a crisis was brewing.

Medcraft says there were mistakes made all along the line. "Markets get exuberant, they become liquid, standards decline, spreads decline and underwriting standards decline and then you have a crash."

He insists that when he retired from Societe Generale in 2007 to return to Australia it seemed as if the market was set to recover. "There was a consolidation going on and there seemed to be a recovery with the smaller consolidators being taken over and it was believed the margins would be sufficient to cover the default rate," Medcraft says.

However, as a result of a rise in the ratio of loans to asset values there were insufficient funds to protect investors, Medcraft says. "It was a problem along the whole value chain, from lender to originator to credit agency to investors."

Medcraft has been accused of being a poacher-turned-gamekeeper but, like most such descriptions, it is simplistic and fails to reflect his strengths as an administrator and innovator.

Association of Superannuation Funds of Australia chief executive Pauline Vamos says over the past year Medcraft has been heavily involved in consolidating the organisation and building its expertise. She says there have been several very impressive recruits at senior levels.

"This starts with the three new commissioners, Peter Kell from the ACCC, Greg Tanzer [formerly Secretary General of the International Organisations of Securities Commissions] and John Price [who has been with ASIC since 1999]," Vamos says.

She points to the increased role of ASIC in regulation of auditors, licensing of accountants (selling investment products), the takeover of market surveillance from the ASX and other financial markets from August 2010.

"If you look at it from this perspective there has been a quite massive transfer of power," she says.

"As a result, a lot of time over the past year has been spent on rebuilding and strategising."

She agrees Medcraft has also been fairly prominent in the media.

"He has a somewhat different approach to regulation than his predecessor and he has sought to put industries on notice that ASIC is prepared to act."

At the same time, she says he is not a micro-manager and is more than prepared to delegate responsibility to key executives such as Greg Yanco, who is responsible for market supervision and worked on surveillance for the ASX. He has also provided a relatively free hand to his executive in charge of capital markets, deputy chairman Belinda Gibson, who spent 20 years with Mallesons before joining ASIC in 2007.

"Certainly there are no roadblocks at the top with key personnel able to make decision in their respective areas of responsibility," Vamos says.

The quality of commissioners and key executives means ASIC has a huge amount of expertise to call upon.

On the issue of Medcraft's lack of a legal background, Vamos says at times his enthusiasm means he can be focused on outcomes which are not achievable in the short-term.

"Regulators are empowered to administer the law, but of course they can play an important role in recommending changes if their surveillance and enforcement activities show that the current laws are not working," Vamos says.

Stephen Bartos, who in 2009 conducted a review of ASIC and the way it was viewed by stakeholders, says the organisation's role in financial markets is increasing and it is playing a critical role as a regulator.

Professor Bartos, now an executive director of economic consultancy at ACIL Tasmin, says the style of the regulator under Medcraft has been more upfront, which he says is important if stakeholders are to be kept informed of the organisation's priorities.

"I am not surprised that there have been suggestions in regard to Medcraft that his appointment was a case of poacher-turned-gamekeeper, but it is inevitable given that he previously held a very senior role in business," Bartos says.

"On the issue of his lack of a legal background, I suspect it is only lawyers that believe they should have a monopoly on regulatory roles. It is far more important for the head of ASIC to be able to demonstrate sound judgment."

However, Bartos suspects it may also be time for another review of stakeholder attitudes in the light of the changes that have taken place in the organisation and its range of responsibilities.

One of the most prominent developments over the past six months was the settlement reached in March with Leighton Holdings over a continuous disclosure breach. The company agreed to a fine of $300,000, although not admitting liability.

Medcraft believes decisions such as that on Leighton and last year's Centro decision – when directors were found to be in breach over the classification of liabilities – in the 2007 annual report were important benchmarks for those in the market.

He also believes the role of ASIC will continue to expand not just because of new responsibilities in areas such as market supervision, but as a result of the growth of superannuation.

Medcraft says the key issues ASIC faces are, first, the impact on financial markets of the likely growth in super from $1.3 trillion to $3 trillion by 2020 and $5 trillion by 2030 and, second, demographic change with a move from accumulation of investments in funds to de-accumulation as a large percentage of the population retires. A third issue is the growth of self-managed superannuation, projected to increase from 33 per cent of all super assets to 40 per cent by 2020, which is basically an unregulated part of superannuation.

ASIC is not directly responsible for supervision of super funds, but has the primary role in financial products, in which super is invested and also how super funds communicate with members. It also supervises gatekeepers such as financial advisers, investment managers, custodians, research houses, credit rating agencies and accountants.

"Super will shape a lot of what we do over the next decade or two," Medcraft says. He also wants to ensure ASIC is pro- active and like "cops on the beat" provides on-the-spot deterrence through its education, surveillance and enforcement activity.

"It is also identifying risks (hence he has established an emerging risk committee) to deal with them before they become a problem."

Medcraft says resources are a challenge, particularly when super is growing at twice the rate of the economy. He says it is about prioritising resources and in that regard one of the key drivers is identifying risk.

"The key issues on prioritising resources are risk assessment, stakeholder expectations, what consumers want, and policy."

He insists one of the reasons the organisation has coped with the rapid changes over the past 12 months is a straightforward approach to management.

"My management style is based on three principles: creativity, simplicity and resilience. It is how I like to approach business," he says. "Have a clear strategy, good communications system both ways and encourage teamwork. So I don't micromanage. I have business plans that reflect my strategy and a performance management framework that is tied in. It's all pretty simple.

"And in terms of performance management there are what I call the three-Bs: you are assessed on business plan, budget and behaviour.

"I see my job as helping my people to meet their business plan, but if they don't perform then they're out."


As a young journalist I got to know the ambitious Greg Medcraft in the 1980s at a time when he was contemplating the move from accounting into banking. The decision to change careers was not an easy one because, unlike many baby boomers, his preference at the time was to build a long career with a single employer.

As the son of a tyre factory fitter and turner in Melbourne's western suburbs, he had succeeded against the odds and was determined not to blow the opportunity. Medcraft was sometimes underestimated by peers because he lacked some of the superficial polish that comes with a private- school education and privileged background. However, the young banker had a remarkable capacity to focus on a problem, was ambitious and driven, an excellent listener, had an outstanding memory, an inventive mind and a head for business.

Last year there was some suggestion Medcraft had been appointed to his role because he was a Labor sympathiser. At one time he was a member of the Labor Party, but he was always more interested in business than politics.

As an independent member of the Box Hill Council in the eastern suburbs he was appointed mayor in 1985, before he was 30. He was instrumental in arranging for a private builder to totally redevelop the local regional shopping centre in exchange for a air rights on the centre, which in the long-term lifted rate income and eventually delivered a major asset back to the community. After a stint in Paris he moved to Sydney where he was mayor of Woollahra from 1996 to 1998.

He also spent eight years in New York working for Societe Generale heading up structured finance worldwide. He retired in 2007 before becoming an ASIC commissioner in 2009 and then chairman last year. - Tom Skotnicki