Penalty increases for corporate and financial misconduct
The Federal Government has sent a clear message it is focused on ensuring the increased penalties for corporate crime and financial misconduct are a serious deterrent. Here, partner Brit Ibanez and lawyer Laura McGill explain the ASIC Enforcement Review Taskforce recommendations and highlight the expanded civil penalty provisions and increasing penalties.
ASIC Enforcement Review Taskforce
The ASIC Enforcement Review Taskforce was established following the Financial System Inquiry to address gaps or deficiencies in the regulatory regime overseen by ASIC.
The Taskforce produced a report in December 2017 making over 50 recommendations for changes to the law. On 20 April this year the Federal Government issued a release generally supporting all of the recommendations and promising to move forward on a number of the recommendations immediately. The recommendations affect eight key areas of the law:
- The breach reporting regime – self-reporting of contraventions by financial services and credit licensees
- ASIC's search warrant powers
- Giving ASIC power to receive telephone intercept material to investigate and prosecute serious offences
- Industry codes of conduct – requiring participants in certain industries to subscribe to an ASIC approved code
- Strengthening ASIC's licensing powers by:
- increasing the circumstances when ASIC can refuse to grant a licence
- strengthening the basis when ASIC can cancel or suspend a licence
- establishing new 'fit and proper' tests for licensees
- creating a statutory obligation for licensees to notify ASIC about changes of control within 30 business days of the change of control taking effect (increased from 10 days), with penalties to apply for failure to notify ASIC
- aligning the applications for credit licences and financial services licences
- Enhancing ASIC's banning power to ensure offending individuals cannot have continued involvement in the financial sector. ASIC will be able to ban individuals from managing financial services businesses in addition to its current power to ban individuals from providing financial services. ASIC will also be able to ban an individual who is unfit or improper for their role
- Strengthening penalties for corporate and financial sector misconduct by:
- expanding the range of civil penalty provisions
- increasing the possible penalties for misconduct in the Corporations Act:
- for individuals – from $200,000 to $525,000 (on current values of penalty units)
- for corporations – from $1 million to potentially $10.5 million (or three times the value of benefits gained or losses avoided or 10 percent of annual turnover in the 12 months before the contravening conduct – but not more than 1 million penalty units which is currently $210 million)
- Giving ASIC the power to seek disgorgement of benefits obtained
- Increasing the term of imprisonment and increasing the penalties available for the most serious Corporations Act offences, like those involving dishonesty
- Giving ASIC wider powers to deal with lower level breaches through the use of penalty and infringement notices and increasing the lowest level fines
- Giving ASIC a 'direction power' to require AFS licensees to modify systems and/or conduct. A directions power will be a less serious consequence than ASIC's current powers to vary, suspend or cancel licences. ASIC will be given the power to direct licensees to take or refrain from taking actions where appropriate and subject always to procedural fairness.
Expanding civil penalty provisions and increasing penalties
The Federal Government has agreed to:
- Increase penalties for certain criminal offences and the strict and absolute liability offences
- Amend the test for dishonest conduct (section 1041G) to remove the requirement the individual knew the conduct was dishonest. The test will now be objective only, ie the conduct was dishonest by the standards of ordinary, decent people
- Make some current strict liability offences ordinary offences (and therefore punishable by a higher fine and/or imprisonment) if ASIC can prove a fault element was present, ie the person knew what they were doing. The provisions which will be made ordinary offences with increased penalties include:
- the obligations on directors of listed entities to notify the market operator of certain interests held by the director (section 205G)
- the prohibition on acquiring a relevant interest in listed companies or entities with more than 50 members (the takeover provisions) (section 606)
- the requirement to give a company or responsible entity notice about substantial holding changes (section 671B)
- the obligation to keep financial records that correctly record and explain transactions and the financial position and performance of a company, registered scheme or disclosing entity (section 286).
The Federal Government has also agreed to expand the civil penalty regime so more breaches of the Corporations Act result in pecuniary penalties and disqualification orders. Civil penalties are intended to address conduct which is very serious but not truly criminal in nature. The civil penalty regime will be expanded to apply to breaches of 33 additional sections of the Corporations Act. The relevant provisions for many of our clients are as follows:
- A person must not operate a managed investment scheme if it is not registered (section 601ED(5))
- A person must not make an offer of securities without a current prospectus (section 727)
- A person must not offer securities under a prospectus if it is misleading or deceptive, or there is an omission or a misstatement (section 728)
- Sections 911A and 911B – Will become civil penalty provisions, ie the need for an Australian financial services licence (AFS licence), and providing financial services on behalf of a person who carries on a financial services business
- Section 912A – Will become a civil penalty provision for breaches of every subsection, except for obligations to comply with the conditions on the licence, and the obligations to comply with the financial services laws
- The obligation on a financial services licensee to breach report will become a civil penalty provision (section 912D)
- A person against whom a banning order is made cannot be granted an AFS licence, and if they undertake conduct breaching the banning order, then that will be a civil penalty provision (section 920C(2))
- Offence for failing to comply with an obligation to notify ASIC (section 922M)
- Obligation on financial services licensees and authorised representatives to give a Financial Services Guide if the financial services were provided to a retail client (sections 941A and 941B)
- Obligation to give a statement of advice – the offence of giving a defective disclosure document or statement, whether or not it is known to be defective (section 946A)
- The offence of a financial services licensee failing to ensure authorised representatives give disclosure documents or statements as required (section 952H)
- The obligation on financial services licensees to ensure money is paid into an account with an Australian Authorised Deposit-taking Institution or prescribed by regulation (section 981B)
- Regulations dealing with various matters relating to accounts maintained for the purposes of section 981B (section 981C)
- The offence of failing to pay loan money into an account (section 993D(3))
- The obligation to give a product disclosure statement (PDS) (sections 1012A, 1012B and 1012C)
- The obligation on trustees of regulated superannuation funds to make product-board publicly available (section 1017BA and 1017BB(1))
- Offers relating to certain managed investment schemes are not to be made in certain circumstances, or if the managed investment scheme has not been registered (section 1020A(1))
- The offence of the preparer of a defective PDS giving the document (section 1021E)
- The offence of a financial services licensee failing to ensure the authorised representative gives a PDS as required (section 1021G)
- The liability of an officer and employee for failing to take reasonable steps to ensure information is not false or misleading (section 1309(2)).
What does this mean?
The Federal Government has not indicated when the proposed initiatives will come into force. However, it is clearly dedicated to ensuring the penalties are a serious deterrent for those engaging in corporate crime and financial misconduct.
Once the draft legislation has been prepared we will provide a further update. If you have any questions in the meantime please contact our team.