Enforcement – How will ASIC meet community expectations?

While accepting ASIC has finite resources, the Hayne Financial Services Royal Commission criticised ASIC for its seeming reluctance to take formal enforcement action and correspondingly its willingness to reach negotiated settlement with Australian Financial Services Licensees (AFSLs) for what appeared to be significant breaches of the law.

Commissioner Hayne’s view was that by its action ASIC failed to ensure adequate general or specific deterrence, and that licensees came to treat breaches and the financial cost to remediate and settle those breaches, as a cost of business.

In response, ASIC has reset its enforcement function, informed by an internal enforcement review. It is based on three building blocks:

  1. A new Office of Enforcement has been created to address concerns raised in the Royal Commission that ASIC had been, at least in part, ensnared by those it regulated. Enforcement teams will be ‘separated’ from the rest of ASIC’s business units and the stakeholder teams which undertake the coal face engagement with industry
  2. If ASIC is satisfied that breaches of the law are more likely than not, it will ask: “Why not litigate?”
  3. To do this, enforcement resources have been significantly increased.

Providing ASIC with additional funding is long overdue. Timely legal outcomes and legal certainty are of equal importance to both ASIC and those it regulates. Often the facts in dispute are important points of law to interpret legal obligations. Delay prolongs uncertainty and potentially impacts consumer protections.

ASIC will take on more investigations. It will seek to complete them more quickly, and will litigate more in court.

Correspondingly, ASIC will be under increased scrutiny when it accepts an enforceable undertaking or infringement notice, and will need to respond to a ‘why didn’t it litigate?’ query.

Meeting public and political expectations in the current environment will be a balancing act and messaging will be key. The fact is there is little prospect that ASIC will be able, with even twice or three times its current resources, to investigate or litigate all breaches of the law of which it becomes aware.

The context

In 2017/2018 reporting period ASIC received 1,885 breach reports from financial services licensees (self-reports), auditors and managed investment schemes. Another 6,840 reports alleging a breach of the Corporations law were submitted by liquidators and external administrators.

Post Royal Commission an AFSL breach report is likely to trigger principle 1 of the ASIC enforcement approach. ‘If there is a reasonable basis to conclude a breach of the law – why not litigate?’
In the same period ASIC also received approximately 9,500 misconduct reports. While it appears many were deemed to be of limited evidential value, the annual report suggests that 21% of the reports, were referred to ASIC stakeholder or enforcement teams for further consideration. Even if only a small number of the reports potentially evidence a breach the law, it seems they will need to be considered for investigation according to the ‘If so – why not litigate?’ yardstick.

In 2017-18 ASIC began 126 investigations along with 1200 surveillances. A surveillance assesses compliance with the law – often a pre-cursor to referral to an enforcement team. Surveillance teams may also choose to resolve the matter by administrative action, or take no further action on public interest grounds.

It is still unclear whether this mechanism has or will change. In its 19 February 2019 update (19-035MR ASIC update on implementation of Royal Commission recommendations) ASIC says it will commence investigations in ‘appropriate circumstances’ and a decision not to litigate would be made by experienced enforcement executives.
Assuming a 50% increase in ASIC enforcement resources, and a corresponding increase in activity, on the 2017/2018 numbers, that would equate to 189 investigations. The issue then is straightforward. How will ASIC decide which matters to litigate if it has inadequate resources to apply to all matters where it is more likely than not that there has been a breach of the law, or where there would likely be adequate evidence if the matter were investigated?

How to proceed?

Currently, the best reference for whether ASIC begins an investigation is Info Sheet 151 –ASIC’s approach to enforcement, which provides that ASIC will have regard to its resources, the impact of general and specific deterrence, and other public interest considerations.

These are sound principles and remain valid.

ASIC cannot litigate every piece of misconduct and nor should it.

For example, the ‘fee for no service’ issue appears systemic in the advice industry. Undoubtedly, impacted customers should be remediated as quickly as possible; and it is important that appropriate enforcement action be taken as a specific and general deterrence. However, commencing litigation against every relevant licensee would be of limited further general deterrence, and restrict ASIC’s ability to focus on other current or emerging issues.
There must be balance.

Presently the balance favours ASIC commencing more investigations and undertaking more litigation. But the community should not expect that every breach can, or will be, investigated or litigated.
In the meantime, we wait to hear more from ASIC on what is meant by appropriate circumstances.

For more commentary from Deloitte on the Royal Commission click here.


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