ASIC Prosecutions and Penalties

The Australian Securities and Investments Commission (ASIC) recently released a report highlighting some of their key enforcement priorities, important cases and decisions during the first half of 2018.

 

What is ASIC’s role?

ASIC investigates and enforces the law to ensure a fair, strong and efficient financial system for all Australians. This is achieved through the use of regulatory tools to:

  • change behaviours to drive good consumer and investor outcomes;
  • promote the strong and innovative development of the financial system; and
  • act against misconduct to maintain trust and integrity in the financial system;

 

Enforcement Objectives and Outcomes

ASIC’s enforcement teams are committed to addressing the key risks outlined in ASIC’s Corporate Plan:

  • poor culture and conduct in financial services and credit, resulting in poor outcomes for investors and consumers;
  • poor culture and conduct in markets, undermining market integrity;
  • financial vulnerability of consumers at key decision points;
  • misalignment of retail product design and distribution with consumer needs;
  • inadequate risk management of technological change, including digital disruption and cyber threats; and
  • cross-border businesses, services and transactions in a continually evolving regulatory environment.

 

ASIC key enforcement outcomes January to June 2018

Investigations
67 investigations commenced73 investigations completed
Bannings and disqualifications
68 people or companies removed or restricted from providing financial services or credit20 people disqualified or removed from directing companies
Prosecutions
13 people charged in criminal proceedings210 criminal charges laid
176 people charged in summary prosecutions for strict liability offences342 criminal charges laid in summary prosecutions for strict liability offences
Civil Penalties
$20.44 million in civil penalties$256.69 million in compensation and remediation for investors and consumers
Infringement notices, compensation and court enforceable undertakings
16 infringement notices issued$213,200 in infringement notices paid
12 court enforceable undertakings$7.57 million in community benefit fund payments

 

 

What are ASIC’s key areas of operation?

ASIC conducts investigations and enforces the law across a number of areas, with a range of potential outcomes including both criminal and civil proceedings, enforceable undertakings, administrative and negotiated outcomes.

 

Corporate Governance

ASIC’s work in corporate governance ensures that public companies are properly accountable to their investors by regulating disclosure by and conduct of corporations and their officers in Australia. Where there are practices that undermine market integrity and investor outcomes, ASIC takes enforcement action to protect investors and consumers.

Action is taken against directors, liquidators and auditors (including self-managed superannuation fund auditors).

 

Pending corporate governance matters as at 1 July 2018

Misconduct typeCriminal Civil
Action against liquidators04
Action against directors1122
Insolvency10
Other corporate governance misconduct23
Total1429

 

Case Study: Holding gatekeepers to account

Company directors and officers, auditors, insolvency practitioners and business advisers are important gatekeepers who hold positions of responsibility and trust, and who are required to lawfully discharge the obligations that these positions carry.

ASIC’s investigations into an Australian individual, which began in May 2014, found that he was a director of companies on both sides of various transactions relating to seed capital raising. ASIC were concerned that care and due diligence were lacking in the performance of his role as a director or company officer in a number of ways including:

  • failing to disclose the conflict of interest to potential investors;
  • providing financial services without having an Australian financial services (AFS) licence or being an authorised representative;
  • failing to keep sufficient documents recording purported commission and loan arrangements;
  • issuing false, misleading or deceptive information memoranda to potential investors; and
  • making unauthorised payments to himself and owned companies.

On 18 January 2018, the individual entered into a court enforceable undertaking with ASIC that will see him and his deregistered company banned from the financial services industry for 10 years. He is also prevented from managing a corporation for seven years and is required to complete a course for directors before being eligible to manage an Australian corporation.

 

Financial Services

ASIC’s work in financial services is focused on improving consumer outcomes by regulating the conduct of financial services and credit providers. Where there are practices that result in or create a risk of consumer harm, ASIC takes enforcement action. This work involves banning financial advisers who provide poor advice to clients.

 

Pending financial services matters as at 1 July 2018

Misconduct typeCriminalCivil
Credit31
Dishonest conduct, misleading statements1118
Misappropriation, theft, fraud210
Other financial services misconduct027
Total1656

 

Case Study: Consumer Credit

On 28 February 2018, the Federal Court ordered Australia and New Zealand Banking Group Ltd (ANZ) to pay a penalty of $5 million for breaches of the responsible lending provisions of the National Consumer Credit Protection Act 2009 (National Credit Act) by its former car finance business, Esanda.

In the civil penalty proceedings, the court found that in respect of 12 car loan applications from three brokers (one of whom had previously been investigated for fraud), ANZ had failed to take reasonable steps to verify the income of the consumer and ability to repay a loan, relying solely on documents which appeared to be payslips.

The statement of facts sets out that reasonable steps to verify a consumer’s income would have included requesting a bank statement from the consumer showing the history of salary deposits or substantiating salary deposits in ANZ bank accounts for an existing customer.

 

Market Integrity

Robust market integrity ensures Australia’s financial markets are fair and efficient, so that firms can thrive and investors can participate with confidence. ASIC undertakes investigations and enforcement action where misconduct threatens market integrity and investor confidence.

 

Pending market integrity matters as at 1 July 2018

Misconduct TypeCriminalCivil
Continuous disclosure06
Insider trading40
Market integrity rules01
Market manipulation33
Other market misconduct43
Total1113

 

Case Study: Financial Benchmarks

On 30 January 2018, ASIC commenced legal proceedings in the Federal Court against Commonwealth Bank of Australia (CBA) alleging unconscionable conduct and market manipulation in relation to CBA’s involvement in setting the bank bill swap reference rate (BBSW) in 2012.

On 21 June 2018, the Federal Court imposed pecuniary penalties totalling $5 million on CBA for attempting to engage in unconscionable conduct in relation to the BBSW.

The penalties were imposed after CBA admitted to:

  • attempting to seek to affect where the BBSW was set on five occasions in the period 31 January 2012 to 15 June 2012;
  • failing to do all things necessary to ensure that the financial services covered by its AFS licence were provided efficiently and fairly; and
  • failing to ensure that its traders were adequately trained to provide financial services.

In imposing the penalties, the court noted the terms of the court enforceable undertaking, where CBA will pay $15 million towards the benefit of the community and $5 million towards ASIC’s investigation and legal costs. CBA will also engage an independent expert to assess changes made to its policies and procedures in relation to prime bank bills trading.

The court enforceable undertaking was accepted by ASIC on 9 July 2018.

 

Small Business

ASIC’s work in small business compliance and deterrence is focused on helping small businesses understand and comply with their legal obligations under the Corporations Act. This is achieved by:

  • engaging with small businesses, industry groups and associations, and other government agencies; and
  • providing information and guidance to small businesses.

ASIC also helps protect small business by working to level the playing field through surveillance, enforcement and policy work. Where necessary, ASIC may take administrative, civil or criminal action against companies, directors and other officeholders who fail in their duties.

This work includes prosecuting illegal phoenix activity, where a company suffers financial distress and cannot (or is simply unwilling to) pay its debts, and the directors transfer assets to a new company for little or no consideration before an external administrator’s appointment. This means that creditors cannot access assets or recover debts, the company avoids paying tax or employee entitlements, and the liquidator is left to see what they can recover.

 

Pending small business matters as at 1 July 2018

Misconduct TypeCriminal
Action against persons101
Efficient registration and licensing18
Total119