Cruel but fair: ASIC's new powers
Harsher penalties and more options
In a recent media release, ASIC announced that it will soon be able to seek more severe penalties after the recent passing of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 through the Senate.
You can track the progress of the Bill here.
The Bill implements some of the ASIC Enforcement Review Taskforce’s recommendations. It amends the Corporations Act 2001, Australian Securities and Investments Commission Act 2001, National Consumer Credit Protection Act 2009 and Insurance Contracts Act 1984.
Aside from the miscellaneous technical and consequential amendments the Bill is drafted to introduce a stronger penalty framework for corporate and financial sector misconduct.
For example, a failure to provide a disclosure document (such as a Financial Services Guide, Supplementary Financial Services Guide or Statement of Advice) within the time provided can now be punished with a five (5) year prison term rather than the pitiful two (2) year penalty previously available to, but never used by, ASIC.
This should significantly reduce misconduct in the financial services industry.
In addition, the Bill will provide reinforcement of the existing framework, increase some of the maximum penalties and introduce some new penalties.
In an environment where the Regulator has been publicly noted as reluctant to take action, this Bill should provide ASIC with a stronger position to help protect consumers.
While ASIC have frequently been criticised for not using the powers they have, these changes may signal that Parliament will no longer accept an inactive and ineffective regulator.
Some of the major changes include:
Maximum prison penalties for breaching director’s duties, false or misleading disclosure and dishonest conduct will increase to 15 years;
Civil penalties for companies to increase to $525 million;
Civil penalties to also include a greater range of misconduct, including Licensee’s failure to act efficiently, honestly and fairly and failing to report breaches, as well as defective disclosure; and
Individual penalties will take profits into account and increase to $1.05 million.
Civil penalties for misconduct
It’s important to appreciate that ASIC’s regulatory actions sometimes have impacts beyond the particular act or actor on which ASIC is focused. In fact, it’s by application of the law (and sometimes testing its limits) that gaps are identified and deficiencies are exposed.
ASIC’s new powers to deal with misconduct are strengthened by the extension of the civil penalty regime to a range of provisions including
subsections 961K(1) and (2) (financial services licensee responsible for breach of certain best interests duties) [Read “Building in ‘Best Interests and better supervision”]
section 961L (financial services licensee to ensure compliance with certain best interests duties); [Read “Building in ‘Best Interests and better supervision”]
section 962P (charging ongoing fee after termination of ongoing fee arrangement);
subsection 962S(1) (fee recipient must give fee disclosure statement);
subsections 963E(1) and (2) (financial services licensee must not accept conflicted remuneration);
section 963F (financial services licensee must ensure representatives do not accept conflicted remuneration);
subsection 963G(1) (authorised representative must not accept conflicted remuneration);
section 963J (employer must not pay employees conflicted remuneration);
section 963K (financial product issuer or seller must not give conflicted remuneration to financial services licensee or representative);
subsection 964A(1) (platform operator must not accept volume-based shelf-space fees);
subsections 964D(1) and (2) (financial services licensee must not charge asset-based fees on borrowed amounts);
subsection 964E(1) (authorised representative must not charge asset-based fees on borrowed amounts);
section 965 (anti-avoidance of Part 7.7A provisions).
You might not be surprised to learn that the maximum civil penalties have increased significantly.
Show me the money
While the Corporations Act previously contemplated civil penalties up to $200,000, Individuals can now face penalties of:
5000 penalty units ($1.05 million); or
if capable of determination – three times the benefit derived from (or detriment avoided by) the contravention. (whichever is greater)
The situation is even starker for bodies corporate. Compare the $1,000,000 penalty that was the maximum that could have been applied under the Corporations Act, with new penalties of:
50,000 penalty units ($10.5 million);
if capable of determination – three times the benefit derived from (or detriment avoided by) the contravention; or
10% of annual turnover, up to a maximum value of 2.5 million penalty units ($525 million)(whichever is greater).
Imprisonment terms have also increased but custodial sentences are probably less likely and more difficult to secure. The maximum penalty for serious criminal offences has increased to 15 years but acting in bad faith or engaging in dishonest conduct can only attract a maximum custodial sentence of ten (10) years.
The legislative intent
According to the Treasury’s summary, the draft legislation seeks to:
update the penalties for certain criminal offences in ASIC-administered legislation, including:
increasing the maximum imprisonment penalties for certain criminal offences;
introducing a formula to calculate financial penalties for criminal offences;
removing imprisonment as a penalty and increasing the financial penalties for all strict and absolute liability offences;
introduce ordinary criminal offences that sit alongside strict and absolute liability offences;
significantly increase the financial penalties for civil contraventions and give courts discretion to strip contraveners of their ill-gotten gains in civil penalty proceedings;
modernise and expand the civil penalty regime by making a wider range of offences subject to civil penalties;
harmonise and expand the infringement notice regime;
introduce a new test that applies to all dishonesty offences under the Corporations Act 2001; and
ensure the courts prioritise compensating victims over ordering the payment of financial penalties.
One of the recurring themes explored by the Royal Commission was honesty.
In fact, one might argue that the root cause of most identified issues was that Licensees (and their agents) simply failed to act “efficiently, honestly and fairly”.
The Penalties Bill may do little to improve efficiency, but it does introduce a new, simpler definition of 'dishonesty' that will apply to all relevant offences under the Corporations Act. Under the new law, conduct is dishonest if it is 'dishonest according to the standards of ordinary people'.
This may not seem to be much of a change but it removes the necessity to prove that the actor knew that the conduct was dishonest.
Consider this change in the context of Commissioner Hayne’s focus on “Dishonest Conduct” and you can start to appreciate how, and how quickly, an active regulator might effect change.
“Open, Constructive and Cooperative”
Commissioner Hayne declared in the Final Report that participants should engage with ASIC in an “open, constructive and cooperative way”.
That was good advice and these changes provide another compelling reason for participants to do so.
We understand that LIF, Grandfathering and disintermediation may be stealing your attention, but we recommend that you focus on these legislative changes.
These are not trivial amendments. We anticipate that these significant changes will be carefully considered by Licensees already struggling with ‘community expectations’, social licensing and ASIC’s cavalier 'why not litigate' engagement strategy.
It’s simply another significant change that needs to be managed as BAU.
Review your risk appetite assessment. Consider whether your risk and compliance function is adequately resourced and capable.
Revisit your remediation and regulatory engagement policies to ensure that you can not only identify and fix issues promptly but also appropriately initiate, and respond to, the Regulator.
Review all your activities and policies through a prism of ‘honesty’ and embed efficiency and fairness in all your measures, processes and procedures.
You are already busy but few licensees can afford to ignore these changes.