ASIC's new era of regulation – the bottom line
ASIC Chairman James Shipton recently addressed the Australian Financial Review Banking and Wealth Summit and the ASIC Annual Forum in Sydney last week about "fairness" in the financial services industry and ASIC's new regulatory approaches, including enforcement and supervisory initiatives.
New ASIC Deputy Chair Daniel Crennan QC, tasked with leading the new Office of Enforcement, has also spoken about ASIC's new "why not litigate" stance.
So, what does ASIC's new strategic direction really mean and how will the "efficiently, honestly and fairly" standard influence its "why not litigate" approach? Special counsel Selina Nutley takes an in depth look at what this means for stakeholders in the funds management and financial services sectors and explains the bottom line.
The fairness imperative
We have previously written in Financial Services Thinking about the "efficiently, honestly and fairly" standard required of financial services licensees. What "efficiently, honestly and fairly" looks like could well differ depending on the nature of your financial services business, particularly for businesses with wholesale rather than retail customers.
Mr Shipton explained ASIC's end goal is to build real trust and confidence in a financial system that is fair, strong and efficient, and to ensure fairness is embedded in every aspect of a financial services business. The Hayne Royal Commission also highlighted the fairness imperative.
Both Mr Shipton and Mr Crennan QC have spoken about "efficiently, honestly and fairly" as not being a difficult concept to understand. They say the community clearly understood that the types of conduct revealed by the Royal Commission were unfair. ASIC's view is "fairness" is a concept we can all readily understand. That is, people recognise unfair outcomes. Fairness means doing what is right, it is the quality of being reasonable and just, and incorporates concepts such as competence and professionalism.
In our view, the concept of fairness is a little more difficult to apply when the investor is not a retail client who has lost their entire superannuation fund but is instead a sophisticated high net worth individual who may disagree with the way a trustee has exercised its powers.
ASIC's recent success against Westpac and BT Funds Management (which is currently being appealed by Westpac and BT Funds Management) was founded on Westpac's breach of the "efficiently, honestly and fairly" standard. The primary basis of the case was the breach of the personal advice provisions, although that argument was ultimately unsuccessful. The Federal Court said Westpac had not breached the personal advice provisions but had breached the "efficiently, honestly and fairly" standard. Our earlier article explaining this case can be found here.
What's the bottom line?
We can be somewhat comforted that ASIC's eye is not necessarily fixed on the wholesale market due to the sheer volume of activity and issues in the retail sector and the resources required to investigate and prosecute breaches. However, the new "why not litigate" philosophy does need some key cases involving wholesale fund managers, but only so the courts will have the opportunity to provide their views about whether those businesses have been run efficiently, honestly and fairly after a fair trial with submissions from both sides.
In the meantime, the "why not litigate" strategy means once ASIC is satisfied a breach of the law is more likely than not and the pursuit of the matter would be in the public interest, ASIC will simply ask "why not litigate?"