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 cooperate 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 reports 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 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.
Under the new enforcement regime—
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—
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.
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—
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:
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.
In this new environment, Hughes highlighted ASIC's awareness that some licensees will be far less likely to cooperate with ASIC than before. He then described this response as 'highly risky' and set out the benefits of a cooperative approach to dealings with ASIC, including consideration for early notification of misconduct and cooperation by licensees.
Ahead of concerns around cooperation, 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.