Less talk, more action from ASIC

Enforcement activity by the Australian Securities & Investments Commission is set to increase.

The commission’s corporate plan for 2019-2023 states that it will be pursuing “high-deterrence enforcement” against large institutions and individuals.

Additionally, the federal government’s Financial Services Royal Commission Implementation Roadmap, released last month, signals a clear commitment on the part of the government to ensure that the corporate regulator has the enforcement powers and funding to give teeth to the new regulatory order. The banking and financial services sector can expect far more regulatory litigation due to four key developments: increased penalties, greater resourcing of ASIC, broader enforcement powers and a greater appetite and expectation of the regulator to bring enforcement ­action in the court.

As of March, legislation increased maximum prison penalties for the most serious corporate offences to 15 years. Civil penalties were also significantly increased: for companies, now capped at $525 million, and for individuals increasing to $1.05m.

Alternatively, if the court can evaluate the benefit derived from, or detriment avoided by the contravention, it is empowered to impose a penalty of up to three times that number.

As part of the same reforms, there are an additional 60 provisions that ASIC will be able to enforce by way of civil penalty proceedings.

This includes making the obligation on Australian financial services licences “to do all things necessary to ensure the financial services covered by the licence are provided efficiently, honestly and fairly” a civil penalty provision.

From a simple cost-benefit analysis it can be seen that the increase in penalties makes the regulator’s pursuit of litigation much more worthwhile. Gone are the days of incurring hefty litigation costs when the highest civil penalty for the worst conduct was pegged at $1m for corporations and $200,000 for individuals under the Corporations Act.

Regulator resourcing has also increased. In March, the Treasurer announced $404m in additional funding over four years for ASIC. This will enable ASIC to expand both its investigation and enforcement teams with a view to increasing enforcement activity.

However, more significant than the increased funding from government is the move to ASIC being industry funded.

In 2017 parliament passed legislation that adopted a cost recovery model that required market participants to reimburse the regulatory cost of ASIC’s activities, including education, surveillance and enforcement.

Before those reforms, the cost of enforcement action taken by the regulator was borne by the taxpayer. Since July 2017, under the cost recovery model, enforcement costs are included in the regulatory costs charged to industry.

ASIC’s ability to charge back enforcement costs may have far-reaching effects as it encourages ASIC to incur the costs of top-shelf litigators from private practice.

If ASIC loses a case and has to pay costs, then those costs may be charged back to industry. By reason of the above developments, the cost side of the cost-benefit analysis is now much less of a concern.

Key to effective enforcement is being able to prove the facts that establish a contravention of the law. Access to information is a necessity.

ASIC has always had strong coercive investigatory powers, including being able to require individuals to answer questions, even if such responses are self-incriminating, and to produce documents. It also could call on the search warrant powers in the Crimes Act with the help of the Australian Federal Police.

However, the government has committed to introducing legislation by year’s end to give ASIC its own search warrant powers and access to telecommunications intercepts.

Added to this, AFSL holders must lodge breach reports with ASIC, and a failure to do so will expose the entity to a civil penalty.

As royal commissioner Ken Hayne stated in his report: “ASIC will approach litigation knowing that the first document to be tendered in evidence will show what the entity has said it has done or may have done in contravention of the law.”

The banking and financial services sector is required by law to confess and in doing so help prove the regulator’s case.

Lastly, ASIC is more willing to litigate having been criticised for its previous reliance on negotiated settlements.

ASIC has established an office of enforcement and adopted a “why not litigate?” enforcement stance.

The commission’s aim is to approach suspected contraventions of the law by asking itself why it would not be in the public interest to bring court proceedings. This approach stems from the view that litigation is of clear public benefit because it achieves deterrence, public denunciation and punishment of wrongdoing.

Only if the public benefits from litigation are outweighed by other factors will another approach be adopted. This does not mean that the regulator will litigate in every instance, but it does mean that regulated entities should expect a significant uptick in regulatory proceedings.

Michael Legg, a professor of law at UNSW, is a counsel at Jones Day. Jennifer Chambers is a partner with the firm