ASIC could be subjected to new oversight body

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed to the Governor-General on Friday (1 February) and publicly released on Monday (4 February), Commissioner Kenneth Hayne concluded that “the law was too often not enforced at all, or not enforced effectively”.

He criticised the Australian Securities and Investments Commission (ASIC) for having “rarely” taken wrongdoers to court in his interim report.

“When banks have disclosed, or ASIC has otherwise learnt of, misconduct, ASIC has almost always sought to negotiate what will be done in response,” the interim report states.

“Rarely has ASIC gone to court to have the defaulting party penalised. The criminal prosecutions that have been brought have all been directed at individuals. Civil penalty proceedings have seldom been brought.”

In his final report, he suggested that when they are considering any legal violation, the critical question they must ask is: “Why not litigate?”

“ASIC will have to ask and answer ‘why not litigate’ in circumstances where the entity itself has reported that its conduct may have breached a relevant provision of the financial services law,” the commissioner wrote in his final report.

He further recommended that, when addressing matters, whether that is a breach report or a complaint, ASIC approach the work ahead “with a clear view of what kinds of outcome are being considered”.

Unless it is clearly in the public interest to not litigate, Commissioner Hayne said “all forms of regulatory enforcement must remain under active consideration” depending on the “kind of conduct” being investigated.

“As investigation proceeds, the conduct will be better understood and its essential character will be more accurately and easily described. Possible responses will become more detailed and more refined. But at every stage along the way, the regulator is working towards one or more identified end‑points. Those end‑points may require re‑definition from time to time,” the final royal commission report states.

He noted that if the recommendations of the ASIC Enforcement Review are implemented – including the passing of the Treasury Laws Amendment (ASIC Enforcement) 2018 Bill, which proposes to introduce civil penalty provisions to a number of Acts – the corporate regulator would be responsible for enforcing harsher penalties for financial sector misconduct.

In addition to the 37 new civil penalty provisions in the Corporations Act that would be added, there would be 11 new civil penalty provisions across the National Consumer Credit Protection Act 2009, the Credit Code, and the Insurance Contracts Act 1984.

Acknowledging that ASIC is in the process of improving its enforcement strategy, Commissioner Hayne proposed the establishment of a “specialist civil enforcement agency” if the corporate regulator is found to have “not sufficiently [enforced] the law within its remit, or if the size of its remit comes at the expense of its litigation capability” in the upcoming years.

Such an agency would, according to the commissioner, “preserve all of ASIC’s regulatory tools, save for the right to litigate in respect of civil penalty provisions”.

Under this arrangement, ASIC would “act as the investigators” and provide a brief of materials to the enforcement agency if an evidentiary threshold was reached, while agency would decide on whether to commence civil penalty proceedings.  

“A specialised litigation agency would have to develop core skills in what is an increasingly specialised area of the law. This arrangement would repose responsibility for determining whether public interest considerations required action or no action in a professional body that would become skilled in making those judgments,” Commissioner Hayne wrote.

“ASIC would retain its licensing authority and the power to take action under a licence. It would remain the entity in regular contact with the regulated population.

“And the risk of industry capture affecting litigation decisions would be removed, by placing that decision in an independent agency.”

However, the royal commission did not recommend that this “radical change” be introduced in the near-term.

“It may be that the removal of a regulatory tool as important as civil penalty litigation would have other effects for ASIC’s work. Those effects would need to be properly understood before taking such a large step,” the final report states.

“But, more importantly, ASIC has acknowledged that its enforcement culture must change. It should be given time to demonstrate that changes can be made and to demonstrate that, once made, the changes are durable.”

Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.

Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.

Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.

[Related: Hayne proposes industry codes become law]