Last week, the Treasurer, the Hon Scott Morrison, and Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer, announced the Government’s response to the Report of the ASIC Enforcement Review Taskforce. This Taskforce was established in October 2016 to review ASIC’s enforcement regime in relation to corporations, consumers and the financial sector. The Taskforce delivered its report to the Government in December 2017 and the Government has agreed (or agreed in principle) to each and every one of the 50 recommendations made.
Although there are some uncertainties as to how the changes to ASIC’s enforcement regime will be implemented, there are a few key takeaways.
Larger penalties in the corporate and financial sectors
Criminal offences in the corporate and financial sectors are expected to attract greater terms of imprisonment. For example:
- Directors and officers that are criminally liable for failing to act in good faith, for a proper purpose, or for misusing their position expect to face a maximum term of imprisonment of 10 years — twice that of the current regime;
- A disqualified person who manages corporations will be subject to a maximum term of imprisonment 5 times that of the current regime, increasing from 1 to 5 years;
- A person who makes a misstatement or omits information from a takeover, compulsory acquisition or buy-out document which is materially adverse to security holders will be subject to a maximum term of imprisonment 5 times that of the current regime, increasing from 1 to 5 years; and
- A person who provides financial services without a licence, or holds themselves out as holding a licence, will be subject to a maximum term of imprisonment of 2 years — a significant increase to the current 6 months.
Pecuniary penalties for criminal offences are also set to change. An individual will be penalised the number of penalty units equal to 10 times the maximum term of imprisonment, whilst corporations will be penalised 100 times the maximum term of imprisonment. Civil pecuniary penalties with maximums of 5, 10 or 15 penalty units will each see an increase to 20 penalty units for individuals ($4,200) and 200 penalty units for corporations ($42,000).
These changes reflect the Taskforce’s view that the current penalties do not align with community expectations, nor do they present a credible deterrent — especially to large corporations. The changes relating to disclosure documents confirm that the fundamental aim of these documents is to protect consumers and ensure transparency in the corporate and financial sectors. Further, in the case of criminal liability for corporate fraud, the increase in penalties harmonises the federal regime with their State and Territory equivalents and removes the difficulties associated with ASIC investigations and the task of determining whether the Commonwealth or State/Territory regime is the most appropriate.
ASIC’s growing power
The Government has also agreed to implement changes to the Australian Securities and Investment Commission Act 2001 (Cth) to expand some of ASIC’s powers. This includes allowing ASIC to:
- receive intercepted telecommunications to investigate and prosecute serious offences;
- refuse an application for an AFSL if it is satisfied that the controllers of the applicant are not fit and proper, and take action if it becomes unsatisfied of this in the future;
- refuse an AFSL application if a material part of the application is false or misleading;
- ban a person from performing a specific function in a financial services or credit business (currently, there is only the power to ban a person from providing the financial services); and
- ban a person from performing a specific function on the grounds that the person is not fit and proper or is not adequately trained to provide financial services or perform their role within the business.
Reforms related to the interception of telecommunications confirm ASIC’s status as a criminal law enforcement agency and that it should have the powers necessary to successfully investigate and prosecute serious offences. Under the current regime, interception agencies are unable to share intercepted material with ASIC. These changes will enhance the level of coordination between ASIC and other law enforcement agencies.
The changes relating to AFSL applications give ASIC more supervision over the financial services and credit sectors. The requirement for controllers to be fit and proper clearly shifts responsibility to the financial services provider. However, use of the term “controllers” may be ambiguous and it is questionable whether this requirement creates an additional, unnecessary layer of regulatory burden.
The expansion of ASIC’s banning powers clearly recognises the increasing complexity of managing financial services providers. The new reforms ensure that, in addition to those that actually provide financial services, senior managers and directors who have been previously been banned from providing financial services cannot pose risk or cause harm to consumers. This is reinforced by the revision of the competence threshold, which will ensure that cultures of non-compliance cannot be perpetuated and that public confidence in the integrity of financial services providers is maintained.
The Royal Commission’s large(r) role
The Financial Services Royal Commission continues to feature prominently in the media and Commissioner Hayne’s report will directly impact on the implementation of a number of the Taskforce’s recommendations. The Government has taken two approaches in its response — either it has pledged to implement legislative reforms (as with the changes listed above) or it has agreed in principle with the recommendation and deferred implementation “to enable it to take account any findings arising out of the Royal Commission”.
The Government has deferred its implementation of:
- a new self-reporting regime for credit licensees;
- extending the reporting regime to misconduct of employees and representatives of the licensee;
- increasing penalties for failing to report;
- mandatory ASIC approval of the content of and governance arrangements for codes of conduct in the financial services sector;
- implementing consumer redress under a code of conduct; and
- new ASIC powers to direct financial services or credit licensees in the conduct of their business.
With all of the above being canvassed at the Royal Commission, the Commissioner’s report (when delivered) will likely direct the Government’s implementation of these recommendations in a notable way.
Now, it’s time to wait
With the Royal Commission now in full swing, the spotlight is well and truly on the conduct of the corporate sector in Australia. And, in the context of a debate of cuts to corporate tax rates, this seems very likely to result in more regulation, greater oversight and powers for ASIC, and stricter penalties for transgressors, as all sides of politics seek to establish their “tough on white collar crime” credentials.
The current Government’s proposed response to the ASIC Enforcement Taskforce, while still short of detail in important areas, demonstrates its desire for a strict, “black letter” approach to consumer protection and corporate integrity. However, with the Royal Commission not due to report until September, the reality is that it will be quite some time before we see legislation implementing the announced changes. Until then, corporate Australia simply has to wait…and corporate miscreants may want to think about a career change.