This article is Part Five in our Royal Commission Series. Subscribe to Financial Services Updates to receive each part of this series. Links to other Parts can be found at the bottom of this article.
ASIC has been called at various stages “a toothless tiger” and “a pawn of the financial services industry”. And the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Interim Report) doesn’t seem to disagree. Which brings up the question – does this mean that the future for ASIC, and the similarly unproductive APRA, is bright? Or, more likely, does it mean that Commissioner Hayne is likely to recommend that there be at least some sort of reform of the regulators in the final report?
Deterrence for Misconduct – ASIC’s Response
The Interim Report was very straightforward in explaining ASIC’s role in the regulation of the financial services industry. Despite the power of the four largest banks in the market, and their importance in relation to market stability and competition, it is the role of the regulator to “mark and enforce” the boundaries of permissible behaviour within the culture of financial services entities, and in particular, on the culture perpetuated within the four largest banks in the market which contributes through a trickle-down effect to the compliance culture in all financial services entities.
But, as stated in the Interim Report, “a regulator ‘speaking softly’ will rarely be effective unless the regulator also carries a big stick.” And the results of ASIC’s history of regulatory responses are less than stellar in respect of enforcement with a big stick. The Interim Report outlines that despite ASIC assigning 70 per cent of its resources to enforcement, in the last five years, 48 per cent of enforcement outcomes were administrative remedies, 20 per cent were enforceable undertakings and other negotiated outcomes, 18 per cent were criminal outcomes, 12 per cent were civil outcomes and 1 per cent were public warning notices.
In the last 10 years, of the 238 criminal proceedings and 277 civil proceedings commenced by ASIC, 194 were resolved through enforceable undertakings, and only 10 were related to the four largest banks. This is despite the fact that in the last 10 years, ASIC has issued 45 infringement notices to the four largest banks and accepted 13 enforceable undertakings.
But what good are enforceable undertakings and infringement notices if they don’t bring about a change in the culture of compliance in the financial services industry?
ASIC’s Starting Point Inappropriate
According to the Interim Report, ASIC’s starting point in relation to misconduct appears to have been how the misconduct can be resolved by agreement and with maximum remediation for the consumer. However, it is arguable that in the adoption of the Model Litigant Policy (outlining the need to limit the scope of legal proceedings), ASIC has inadvertently not discouraged improper behaviour in the financial services industry as entities are subsequently empowered to define the scope, terms and extent of their punishment for breaching the law.
Ironically, none of the four large banks had a word of negative criticism for ASIC in the Interim Report, a fact commented on by Commissioner Hayne, pointing to “a regulated community having its way about when and how the law will be enforced.” The consequence has been that financial services entities approach misconduct and breaches of the law as involving a calculation of risk of financial detriment, with consequences imposed by ASIC that are not only manageable, but do not provide an adequate deterrent effect which is what is required to effect change.
ASIC and APRA Past and Present
ASIC’s prior conduct has been less than exemplary on the enforcement front with key enforcement cases like Forrester, ABC Learning, Westpoint, Opes Prime and Storm Financial, resulting in criticism on many fronts for the regulator. The High Court’s commentary in Forrester that “the presentation of a range of alternative arguments is not apt to aid comprehension or coherence of analysis and exposition; indeed, this approach may distract attention from the central issues” points to continued failures. ASIC’s handling of the bank bill swap rate rigging case has also caused further embarrassment and more damage to ASIC’s reputation.
And despite Commissioner Hayne acknowledging that ASIC’s approach has changed significantly since the beginning of the Royal Commission, the Interim Report outlined five factors contributing to ASIC’s current enforcement problems:
- the size of ASIC’s remit – in particular the comment that ASIC being called on to provide guidance (which was noted as being excellent) in relation to expanding regulatory regimes seems to be at the expense of focusing on enforcement
- the entrenched culture of negotiated outcomes in relation to proceedings rather than punishment – ASIC is not focusing on what it wants in a negotiation but only considering what the entity is prepared to give and therefore the negotiated outcomes are not satisfactory
- the remediation of consumers –although ASIC has paid attention to how the entity will remedy those hurt by its conduct it hasn’t been focusing on the fact of the contravention itself and providing consequences for the fact that there was a contravention
- the negative financial consequences for entities even when proceedings are brought against them for a contravention are less than the profit gained (i.e. they may make a profit from a breach of the law even after they have faced legal and financial consequences for their contravention)
- the fact that there appears to be no effective mechanism for keeping ASIC’s enforcement policies and practices congruent with the needs of the economy more generally.
APRA’s response was also criticised by the Interim Report as largely ineffective, however, unlike ASIC, it is constrained by the ambit of the financial system stability laid out for them in the legislation.
What’s in Store for the Future?
- increasing and harmonising penalties for the most serious criminal offences under the Corporations Act 2001 (Cth)
- expanding the range of contraventions that are subject to civil penalties
- announcing that ASIC’s powers will also be significantly increased.
ASIC has also commenced a new program where its staff will be embedded within the four banks and AMP, with the first organisation under the program to be CBA.
Some industry commentators as well as Commissioner Hayne have stated that additional regulation or law is not an option, with the relevant enforcement powers already available to ASIC under the current financial services regime. However, other industry commentators have gone further, with opinions and suggestions ranging from seeking an oversight board that would sit above ASIC and/or APRA to wanting to replace them altogether with a new regulatory body.
What we do know is in store for the regulators in the future is waiting for Commissioner Hayne’s recommendations in the Final Report which has an expected release date of 19 February 2018.