ASIC has recently released its quarterly enforcement report detailing enforcement outcomes between 1 July 2014 and 31 December 2014. The report addresses the range of criminal and civil action taken by the regulator, and highlights action taken against companies and directors resulting in criminal charges which were most significant during the period.
In addition, significant civil penalties were also handed down to financial services licencees and there are a number of issues worth highlighting to those operating in the financial services sector.
1. Expect the magnitude of penalties to increase
The courts have imposed significant civil penalties in response to proceedings commenced by ASIC. In particular, a $1.2 million penalty was imposed on Newcrest Mining Limited (Newcrest) for contravening its continuous disclosure obligations by briefing analysts on price-sensitive information ahead of disclosure to the market.
This penalty is one of the largest monetary penalties imposed in an ASIC civil penalty case. Nonetheless, Justice Middleton commented in that the current level of penalties (capped at $1 million for each contravention) may not be a sufficient deterrent for large organisations. Consistent with Justice Middleton’s comments, the Financial System Inquiry (FSI) also recommended that the penalties for breaches should be substantially increased to act as a credible deterrent.
It is apparent that ASIC is keen to amplify the fear of prosecution by way of increasing penalties. With the backing of the courts and the FSI, we expect Treasury to give genuine consideration to increasing the penalties beyond the $1 million limit for each contravention.
2. ASIC is not satisfied with the level of supervision of representatives in the retail space
ASIC stresses that AFS licensees must have appropriate resources and procedures in place when providing financial services to retail clients. In a recent media release, ASIC reported that it imposed conditions on the life insurance advisory firm, Guardian Advice, after it found that Guardian Advice failed to comply with its general obligations as an AFS licensee, including failing to properly supervise its authorised representatives. The condition was that Guardian Advice must appoint an ASIC-approved independent consultant to review its compliance over the next two years. While no penalties were enforced, the imposition of an ASIC-approved auditor is extremely costly and invasive.
The FISI’s concerns over the quality of advice in Australia has been well publicised. However, the issue for ASIC is not just one of advice, but one of supervision and control of agents and representatives. We anticipate ASIC will take an even more active role in undertaking surveillance in respect of these arrangements in the coming year and we anticipate an increase in enforcement action where systems and procedures are not considered adequate.
3. Marketing and sales processes must not be false and misleading
GE Capital Finance Australia (GE Capital) was fined $1.5 million for making false or misleading representations to more than 700,000 of its credit card customers. The court found that GE Capital told its credit card customers that to activate their credit card, or to apply for or obtain an increased credit limit, the customer also had to consent to receiving invitations to apply for credit limit increases. These statements were false or misleading because GE Capital did not require consent for credit cards to be activated or for credit limits to be applied for or increased. GE Capital was ordered to pay ASIC $50,000 for legal costs and to advise cardholders of the decision.
Care should be taken to ensure that marketing strategies do not involve compelling consumers to do something that is not in fact required, for the purposes of cross-selling, upselling or promoting new products. ASIC will impose penalties on companies, in particular large organisations, that engage in false or misleading behaviour, and organisations should expect those penalties to be severe where the conduct is systematic.