Overview of ASIC's recent update on planned actions to implement the Financial Services Royal Commission's recommendations including the establishment of a functionally separate Office of Enforcement within the regulator.

Key takeouts

ASIC said it is committed to fully implementing each of the ASIC-specific recommendations: in the Financial Services Royal Commission's Final Report.


New Office of Enforcement: As part of its response to recommendation 6.2, ASIC has announced the establishment of a 'functionally separate' Office of Enforcement.


Enforcement approach: 'The guiding principles and operational guidelines approved by the Commission for the Office of Enforcement and ASIC generally will have as their predicate a focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation' ASIC writes.


ASIC is already taking a more active approach: Since 1 February 2018, there has been a 15% increase in the number of ASIC enforcement investigations on foot and a 50% increase in the number of ASIC enforcement investigations of misconduct by large financial institutions (or their employees or subsidiary companies).


Expect action: ASIC also notes that it is currently 'undertaking a large volume of work on a range of misconduct relating to major financial institutions and their representatives' and that it expects these investigations to result in a number of referrals to the Commonwealth Director of Public Prosecutions.

Introduction

The Australian Securities and Investments Commission (ASIC) released an update on its planned actions in relation to the recommendations of the Financial Services Royal Commission on 19 February. ASIC said it is committed to fully implementing each of the ASIC-specific recommendations.

ASIC Chair, James Shipton, said the update 'is a crucial document for ASIC as it highlights our important work to date of putting ASIC on a more effective strategic footing, including creating a functionally separate Office of Enforcement'.

An overview of ASIC's response to ASIC-specific recommendations, including the establishment within ASIC of an Office of Enforcement in 2019, is below.

Some Key Points: Implementation of ASIC-specific recommendations

  • Amendments to the Australian Banking Association Code of Banking Practice: ASIC will commence work 'immediately' with the Banking Industry on 'appropriate amendments to the Banking Code' in relation to recommendations 1.8 (Amending the Banking Code:access to banking services), 1.10 (amending the definition of 'small business' in the Banking Code) and 1.13 (charging default interest). ASIC gives no timeframe for completion of this process.
  • Enforceable code provisions: ASIC states that it will work with industry 'in anticipation of the Parliament legislating reforms in relation to codes and ASIC's powers to provide for 'enforceable code provisions' (recommendation 4.9). This work focus on identifying which code provisions need to be made 'enforceable code provisions' on the basis they govern the terms of the contract made or to be made between the financial services provider and the consumer. ASIC adds that it will also continue to work within the existing law to improve the quality of codes and code compliance.
  • Grandfathered commissions: Consistent with the Government's response to recommendation 2.4, ASIC will monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration for the period 1 July 2019 to 1 January 2021. This will include consideration of the passing through of benefits to clients, whether through direct rebates or otherwise.
  • Reducing the cap on commissions in respect of life risk insurance products to zero? ASIC will consider recommendation 2.5 and factors identified by the Royal Commission in undertaking its post implementation review of the impact of the ASIC Corporations Life Insurance Commissions Instrument 2017/510, which set commission caps and claw back amounts, and which commenced on 1 January 2018.
  • ASIC's Enforcement approach: In response to recommendation 6.2, ASIC states that it has adopted a 'Why not litigate?' enforcement stance and initiated an internal enforcement review (IER). ASIC's will also create a separate Office of Enforcement (within ASIC).
  • Cooperation with APRA: In response to recommendation 6.10, ASIC states that it is working with APRA to enhance cooperation arrangements between the regulators, including by revising the existing Memorandum of Understanding. ASIC states that this work is expected to be completed 'in 2019.'
  • Application of the BEAR to itself: ASIC will commence work on developing accountability maps consistent with the BEAR and in doing so, consider the approach of the UK Financial Conduct Authority. ASIC will develop and publish accountability statements before the end of 2019.

New Office of Enforcement

As part of its response to recommendation 6.2, ASIC announced the establishment of and Office of Enforcement. The establishment of the Office of Enforcement was also recommended by the recently completed Internal Enforcement Review (IER) (led by Deputy Chair, Daniel Crennan QC). ASIC states that the Office of Enforcement will be responsible to the Commission for investigation and enforcement of contraventions of the laws that ASIC administers. It will be required to report annually against Key Performance Indicators (formulated by the Commission), and will also be required to prepare and provide comprehensive data and analysis (at least annually) evaluating its performance 'quantitatively and qualitatively'.

Guiding principles

'The guiding principles and operational guidelines approved by the Commission for the Office of Enforcement and ASIC generally will have as their predicate a focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation' ASIC writes. The principles are as follows.

  1. Principle One: Where a possible breach of the law is known to ASIC, ASIC will undertake an assessment and, if appropriate, conduct an investigation by reference to the facts and law. Once ASIC is satisfied that breaches of law are more likely than not, it will ask itself: why not litigate?
  2. Principle Two: Any public interest in pursuing a (non-court) negotiated outcome is weighed against the clear benefits of a judgment and imposition of a prison sentence, civil penalty or other court-based outcome with a negotiated outcome pursued only where objective assessment weighs in favour of the negotiated outcome.
  3. Principle Three: There is a focus on both corporate accountability and individual accountability particularly at executive and board level for breaches of the legislation administered by ASIC.
  4. Principle Four: Emerging technologies are employed to enhance ASIC's enforcement capabilities and these technologies are monitored so ASIC keeps pace with advances in these technologies.
  5. Principle Five: There is careful monitoring of, and an endeavour to pre-empt, budgeting and resourcing requirements.

Update: Enforcement approach

  • Why not litigate? stance: ASIC emphasises that it has already taken steps to change its enforcement approach adopting a 'why not litigate' stance publicly from October 2018 and securing additional funding to enable it to accelerate enforcement actions. As an 'early indication' of this change, ASIC writes that since 1 February 2018, there has been a 15% increase in the number of ASIC enforcement investigations on foot and a 50% increase in the number of ASIC enforcement investigations of misconduct by large financial institutions (or their employees or subsidiary companies).
  • Broader strategic change program: ASIC adds that its changed enforcement approach is part of a broader change program initiated in 2018. This includes: a) additional Commission members and a new leadership structure; b) a new Vision and Mission; c) changes to ASIC's governance, structure and decision-making; d). the adoption of new regulatory and supervisory approaches (eg Close and Continuous Monitoring (CCM) and use of 'next generation regulatory tools').
  • ASIC's extended remit and strengthened powers and penalties: Referencing Commissioner Hayne's recommendation to retain the 'twin peaks' model of financial regulation, ASIC notes the many recommendations included in the report to 'strengthen and contemporise' it. With respect to new penalty provisions, ASIC comments that 'as a result of the recommendations and current reforms, there will be over 60 additional penalty provisions that ASIC will be able to action' which provide 'greater deterrence value'. ASIC highlights the passage of Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 as an example of this. The AFR quotes ASIC deputy Commissioner Daniel Crennan QC as commenting the regulator now is 'less likely to engage in negotiated outcomes because we've got a broader regulatory toolkit of penalties' and that using directors' duties to hold individuals accountable will be one avenue ASIC will pursue.

Update: Royal Commission referrals (and other enforcement work)

  • ASIC states that it 'does not comment on actual or potential investigations'. However, the update confirms that in addition to the two referrals made during the course of the hearings, the 11 specific referrals were made to ASIC in relation to eight entities. ASIC states that it has 'prioritised work on those matters' and will provide updates as appropriate for example, where proceedings are commenced.

  • In addition to the specific referrals, ASIC adds that enforcement teams are undertaking investigations into 12 matters that were case studies before the Royal Commission, has commenced proceedings in relation to a further two and is assessing another 16 case studies to determine whether investigations should be commenced.

  • ASIC is also 'undertaking a large volume of work on a range of misconduct relating to major financial institutions and their representatives'. ASIC states that it expects these investigations to result in a number of referrals to the Commonwealth Director of Public Prosecutions.

Resourcing Required

  • ASIC states that it 'will work with the Government as it seeks to ensure that regulators remain appropriately resourced and as it considers what additional funding is required in the 2019–20 budget context'.

[Sources: ASIC media release 19/02/2019; ASIC update on implementation of Royal Commission recommendations 19/02/2019; [registration required] The AFR 19/02/2019]