Risky business: failure to co-operate with ASIC

November 2019

AFS licensees recently received valuable insight into ASIC's 'Why not litigate?' enforcement philosophy, with ASIC sending a clear warning to the boards and management of licensees that failing to co-operate with the regulator is 'highly risky'.

Recently, ASIC Commissioner Sean Hughes shared some guidance on ASIC's new 'Why not litigate?' policy at the Annual Conference of the Banking and Financial Services Law Association—Banking in the Spotlight. Here, Emma Donaghue and Tim McCarthy report on the ongoing areas of focus for ASIC's Office of Enforcement in light of boosted funding and new laws to further strengthen ASIC's enforcement powers.

The changing enforcement regime

The Banking Royal Commission was particularly critical of ASIC's approach to enforcement which was described as 'How can this be resolved by agreement?' In response, ASIC adopted the 'Why not litigate?' philosophy, with Hughes explaining ASIC's aim now is to demonstrate this shift in policy is durable: the law is being obeyed and ASIC is performing its enforcement role.

For example, Hughes noted the absence of effective penalties or remedies available to ASIC, even for breaches of fundamental licensee obligations under the Corporations Act, such as the duty to provide financial services efficiently, honestly and fairly, to have adequate arrangements for the management of conflicts of interest, and the training and supervision of representatives.

This has changed and new penalties are in place. Hughes' speech indicates ASIC has a renewed will and greater resources for enforcement. It is clear ASIC plans to make greater use of the regulatory tools available to it and will be shining a spotlight on the boards and management of licensees.

New penalties and enforcement

Under the new enforcement regime—

  • civil penalties apply to certain misconduct, where there was previously no penalty
  • some penalties have been strengthened, including—
    • increasing maximum prison penalties for the most serious offences to 15 years
    • increasing the maximum civil penalties to over $1 million for individuals and $525 million for companies
    • extending the infringement notice regime and introducing the power to strip offenders of proceeds gained through non-compliance (known as 'disgorgement') in civil proceedings.

Civil penalties now apply to broader misconduct, including failure to report breaches, carrying on a financial services business without a licence, defective disclosure, and breaches of the duty of utmost good faith under the Insurance Contracts Act. Previously, no penalties were available to the regulator for breaches of the provisions dealing with the general obligations of holding a financial services licence.

Funded by a Federal Government commitment of over $400 million across the next four years, ASIC has embarked on a recruitment drive to increase its investigative and enforcement capacity. Also, the Office of Enforcement has been established to—

  • centralise decision-making and adoption of the question 'Why not litigate?'
  • focus on priority matters to improve adequate resourcing
  • adopt uniform procedures in its enforcement approach.

Flowing from these reforms, Hughes reported a 20 percent increase in the number of ASIC enforcement investigations between July 2018 and June 2019. At the heart of these reforms is the 'Why not litigate?' maxim.

Understanding ASIC's new enforcement culture

Hughes described the 'Why not litigate?' maxim as a procedural discipline to guide ASIC in reaching its aim of deterrence; that is, to ensure the public expectation that wrongdoing by licensees is punished and publicly denounced through the courts.

For ASIC, the question comes to play once—

  • it is satisfied breaches of the law are more likely to have occurred than not
  • the facts of the case show pursuing the matter would be in the public interest.

Then, the question ASIC will ask itself is 'Why not litigate this matter?'

In answering this question, Hughes said ASIC has adopted some of the policies used by the Commonwealth Director of Public Prosecutions, including the seriousness of the offence, the circumstances of the victims, the attitude of the offender, and the effectiveness of the penalty as a deterrence. Hughes also added the following considerations:

  • Pursuit of criminal or civil action or a licensing or banning action—ASIC will look to the nature, severity, impact and prevalence of the conduct and the effectiveness of the action as a deterrent.
  • Action against the corporation, individuals or both—Hughes said the financial services industry sometimes looks at fines or penalties being a 'cost of doing business'. Deterring this attitude will be a consideration for ASIC when deciding who to pursue.

The focus, said Hughes, will be on cases with a high deterrence value. This means pursuing cases where ASIC can utilise its new powers and penalties, particularly in cases where the law is unclear, and where ASIC can bring penalties to bear against both the corporate licensee and its individual officeholders.

Moving forward

In this new environment, Hughes highlighted ASIC's awareness that some licensees will be far less likely to co-operate with ASIC than before. He then described this response as 'highly risky' and set out the benefits of a co-operative approach to dealings with ASIC, including consideration for early notification of misconduct and co-operation by licensees.

Ahead of concerns around co-operation, however, licensees should ensure they have adequate and up-to-date compliance procedures in place. Current procedures, and the knowledge and training of compliance officers and representatives, may mean the long road leading to ASIC asking 'Why not litigate?' is avoided.

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