The Australian Securities and Investments Commission (ASIC) has faced criticism in the past of being ‘too soft’ in its enforcement against financial and corporate crime.
In light of the Financial Services Royal Commission which identified key industry failures, ASIC has ambitious plans to revolutionise its approach to enforcement and supervision, addressing recommendations from the Royal Commission whilst improving market integrity and strengthening corporate governance.
These plans are outlined in its recently released four-year Corporate Plan (2019-23).
Big brother is watching you
In its Corporate Plan (“the Plan”), ASIC details a range of measures which will allow it to undertake intensive supervision to support early intervention.
Advanced data and market analytics will be used to identify cultural and organisational failings that increase the risk of consumer harm and breaches of the law.
Close and Continuous Monitoring program
Launched in October 2018, the Close and Continuous Monitoring (CCM) program involves ASIC teams spending time onsite with the five largest financial services institutions to engage with the firms on risk management and compliance culture.
The program involves improving the ability of entities to effectively detect and respond to breaches of laws, resolve internal disputes and consumer complaints.
Although this work will initially be carried out with a handful or organisations, it will provide an indication of the broader culture and systems issues in the industry. The number of large and complex financial services entities monitored through the program is set to increase over the next four years.
ASIC is developing a model for public reporting and plans to publish its observations of firm practices in late 2019.
Corporate governance
Through the creation of a dedicated Corporate Governance Taskforce, ASIC will review the corporate governance practices of entities in the CCM program, as well as other ASX 100 entities from various industries.
The focus is on improving management oversight and accountability in large, listed companies, and this will be achieved by examining practices such as:
- non-financial risks
- the granting of variable remuneration for key management personnel
- the consistency of company disclosures with actual practices
Key areas for improvement, as well as best practices, will be identified and reported on in the second half of 2019.
Expanded oversight of financial markets
ASIC is enhancing its oversight of financial market intermediaries, with a specific focus on large and complex organisations (e.g. Macquarie Group) to facilitate early risk detection and mitigation, provide feedback and guidance, and take regulatory action when needed.
This involves onsite reviews and meetings with key staff to allow for a thorough review of factors such as:
- internal systems and controls
- risk programs and training
- corporate governance
- compliance arrangements
- pre-trade and post-trade controls
- client disclosure arrangements
Punishing and publicly denouncing wrongdoers
ASIC states that the aim of its enforcement work is to “effectively bring wrongdoers to account through punishment and public denunciation”. This not only deters poor behaviours, but also encourages the adoption of better behaviours and more ethical organisational cultures.
As outlined in the strategic priorities section of the Plan, ASIC’s number one focus over the next four years will be on enforcement action in cases of the highest deterrence value, particularly those causing serious harm to vulnerable consumers. ASIC seeks to increasingly detect, punish and publicly denounce unlawful conduct through the courts in line with community expectations.
ASIC has also prioritised 45 matters highlighted by or arising from the Financial Services Royal Commission. Where ASIC determines that a matter should be prosecuted, it is typically referred to the Commonwealth Director of Public Prosecutions (CDPP).
Increased enforcement capability
ASIC has recently established a dedicated Office of Enforcement, responsible for carrying out ASIC’s key enforcement activities for market, corporate and financial sector misconduct. The Office of Enforcement is comprised of analysts, investigators and lawyers, and there are plans for continued growth over the next year.
Furthermore, ASIC has an arsenal of increased powers to carry out its enforcement agenda, as per new laws introduced under the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019.
The new laws:
- increase maximum prison terms for the most serious offences to 15 years per individual
- increase civil penalties for individuals and companies up to $525 million
- introduce a specific civil penalty for breaches of s912A of the Corporations Act 2001 to ensure that financial service providers act ethically
Product intervention power and design and distribution obligations
In addition to its expanded enforcement capabilities ASIC now also has the power to intervene at the product stage, where it perceives that financial products are likely to result in significant consumer detriment.
ASIC is currently working on developing regulatory guidance outlining how it can use this power, and is examining its application in specific industries. One example provided is the short term credit industry, where significant harm may arise from the provision of short term credit at high cost to vulnerable consumers.
Financial services providers will also be subject to new design and distribution obligations, requiring financial and credit products to be designed, marketed and distributed in ways that promote fairer outcomes for consumers.
ASIC will consult on guidance about the obligations in late 2019 before they commence in April 2021.
