The Australian Securities and Investments Commission (ASIC) has recently released its 2018-19 annual report (“the Report”) outlining significant changes on the horizon with enhanced supervision and enforcement.
A key impetus for these sweeping changes is the recent Financial Services Royal Commission, which highlighted important weaknesses in the regulation of the financial services industry.
ASIC’s strategic change program involves asserting a tighter hold over the industry with continuous supervision, and using its new penalties and powers to significantly increase court-based enforcement matters.
These changes are part of a comprehensive four year plan, which has received $474 million funding from the Australian government in order to strengthen and expand ASIC’s capabilities, allowing it to better address misconduct in the financial services sector and implement the Royal Commission recommendations.
In July 2019 ASIC established a dedicated Office of Enforcement to strengthen its capabilities and enforcement effectiveness. The Office will operate under the following principles as outlined in the Report:
- a single enforcement strategy for ASIC
- strengthened governance structures across all of ASIC’s enforcement functions – for example, a dedicated Corporate Governance Taskforce has been established to improve management oversight
- collective prioritisation and accountability for delivery of the most strategically important enforcement matters across ASIC
- flexibility in resource allocation across specialist enforcement teams within the Office
- collective accountability for enforcement capability building, including for enforcement training and the use of technology and data across the Office. ASIC is also developing ‘next generation’ regulatory tools (e.g. behavioural sciences, regulatory technology, data analytics)
- ensuring that proper consideration is given to possible criminal and civil litigation outcomes by applying the ‘Why not litigate?’ operational self‑discipline.
Increased investigations in line with community expectations
ASIC’s aggressive approach to enforcement aims to address the community expectation that unlawful conduct should be punished and publicly denounced through the courts. High deterrence enforcement action will focus on targeting the most serious cases of concern to the public, particularly those involving vulnerable consumers as well as referrals from the Royal Commission.
In order to achieve greater enforcement and more court‑based outcomes, ASIC has increased investigations by 20% over the past year. There has also been a 51% increase in enforcement investigations involving Australia’s largest financial institutions and a 216% increase in wealth management investigations, sending a clear signal that corporate misconduct will not be tolerated.
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
A ‘hands on’ approach to supervision
In addition to stronger enforcement, ASIC also aims to promote cultural and behavioural changes within the financial services industry through enhanced supervision.
This will be enabled through the Close and Continuous Monitoring (CCM) program which will initially apply to Australia’s largest financial services institutions (AMP, ANZ, CBA, NAB and Westpac). Onsite supervision will be implemented for these institutions to review specific practices, improve the ability of these entities to effectively detect and respond to breaches of laws, resolve internal disputes and consumer complaints.
Key aims of this ‘hands on’ approach are to encourage a shift in leadership mindset, non‑financial risk management, day‑to‑day behaviours and decision making.
Comprehensive reviews will be conducted in areas such as breach reporting and internal dispute resolution, with recommendations issued to ensure that these institutions are effectively addressing these areas.
There will also be greater transparency and accountability, with ASIC taking a comparative look across the groups and publishing public statements regarding the findings.
Another key objective of the CCM program is to identify deficiencies at an early stage and to ensure that they are promptly and directly identified and elevated to key decision makers.
Whilst the program will initially focus on Australia’s largest financial services institutions, ASIC plans to expand the program to additional large and complex financial services entities.
ASIC has clearly set some lofty goals, which have been strategically prioritised for maximum impact. The seven key strategic priorities for 2019–20 are:
- High-deterrence enforcement action– prosecuting and ‘making an example’ of the most serious offenders to help deter financial and corporate crime. ASIC states that the aim of this enforcement work is to “effectively bring wrongdoers to account through punishment and public denunciation”.
- Prioritising the recommendations and referrals from the Financial Services Royal Commission– ASIC’s regulatory work is being guided by the outcomes and recommendations of the Royal Commission. It will support key law reforms to achieve these recommendations and will prioritise Royal Commission referrals in order to progress them efficiently and effectively.
- Delivering as a conduct regulator for superannuation– becoming the primary regulator of conduct in superannuation, in line with the Royal Commission recommendations. Involves supervision and surveillance of superannuation trustees and taking regulatory/enforcement action.
- Addressing harms in insurance– involves taking regulatory/enforcement action against mis-selling, reviewing product features and practices that raise concerns, and supporting insurance law reforms.
- Improving governance and accountability– involves enhanced supervision of key firms, enforcement to hold individuals accountable for corporate governance failures that cause harm and supporting new laws to deter misconduct.
- Protecting vulnerable consumers– taking regulatory action against irresponsible actions by financial services providers towards consumers facing hardship
- Addressing poor financial advice outcomes– targeting misconduct and potential harm to consumers that may arise as a result of the industry’s shift towards ‘general advice’ models
2019 key achievements
ASIC not only has big plans but is already achieving some impressive results and delivering on its goals. Over 100 investigations were completed in 2019, resulting in 26 individuals being charged in criminal proceedings and 10 of these people being imprisoned.
$12.7 million in civil penalties were imposed by the courts, and significant bannings were enforced including:
- 182 people removed or restricted from providing financial services or credit
- 62 people disqualified or removed from directing companies
- 55 actions taken against auditors and liquidators
The Report provides further insight into the enforcement tools utilised by ASIC including infringement notices and court enforceable undertakings, and shows that the results achieved throughout the year are a collaborative effort through engagement with over 1400 stakeholders.
ASIC cannot achieve its ambitious goals on its own, and relies on regional and international cooperation with peer agencies, industry and the public to support its work. Examples of this work include:
- Working with overseas counterparts to keep up with international developments, exert influence on global regulatory policy, and to facilitate investigations through the provision of mutual legal assistance
- Establishing a dedicated Office which coordinates the recording and actioning of reports from whistleblowers
- Delivering capacity building workshops in neighbouring regions
- Facilitating misconduct reporting by a range of stakeholders including the public, licensees and auditors
- Inter-agency collaboration on financial crime, for example participating in the:
- Serious Financial Crime Taskforce: a multi‑agency initiative targeting offences related to serious fraud, money laundering, and defrauding the Commonwealth
- Phoenix Taskforce: collaborating with the federal, state and territory agencies to combat illegal phoenix activity. Recently, a former company director was imprisoned for 12 months for engaging in this type of activity.
ASIC has outlined a tough new approach to the enforcement of corporate and financial misconduct, as well as enhanced supervision to shift the mindset of the industry and prevent these problems from occurring. These measures are largely in response to the findings of the Financial Services Royal Commission, as well as perceptions by the public that corporate wrongdoers are not being held sufficiently accountable for the damage that they cause.
With tough new penalties and further changes on the horizon, such as expanding the scope of financial institutions that will be monitored as part of the Close and Continuous Monitoring program, ASIC is sending a clear signal that increasing numbers of companies and individuals will be held accountable for corporate and financial crime, and will not just receive a ‘slap on the wrist’.