Alert | April 2019
It's time to get efficient, honest and fair. Or else.
On 12 March 2019, the Treasury Laws Amendment (Strengthening Corporate And Financial Sector Penalties) Act 2019 received assent after passing both houses of Parliament. Commencement of most provisions has occurred. Treasury stated that its intention is to arm our financial services regulators with the powers needed to take strong action to protect consumers and to deter and prosecute corporate and financial sector misconduct. It also follows on the heels of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal commission) which made clear that conduct of institutions within the sector fell well short of 'community expectations'. Commissioner Hayne also observed that increased penalties for misconduct will have only limited effect unless there is a greater willingness by ASIC to apply them.
The Act includes new and increased civil penalties and criminal sanctions against banks and other financial sector institutions, their executives and others across the full spectrum of financial services laws administered by ASIC. These include the:
National Consumer Credit Protection Act 2009 (including National Credit Code) (Credit Act);
Corporations Act 2001 (Corporations Act);
Australian Securities and Investments Commission Act 2001 (ASIC Act);
Insurance Contracts Act 1984 (Insurance Act); and
Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (which we assume enacted).
Features of the Act include:
Increase in maximum prison penalties (5 years increased to 15 years). Serious offences includes intentional or reckless breaches of director's and officers duties, false or misleading disclosure, client monies and dishonest conduct (amongst others - see table 1).
Increase in civil penalties for individuals and companies (maximum of $1.05m and $525 million or up to 10% of profits). Such offences will now include a licensee's failure to act efficiently, honestly and fairly or failure to report breaches (amongst others - further detail below).
All strict and absolute liability offences no longer carry imprisonment as a possible penalty however increased financial penalties (4-5 times existing penalties) and new infringement notice regime applicable.
Further detail around the categories of laws to which the new penalties and offence provisions apply is set out in the tables below.
Background to reforms
These recent changes follow the recommendations of the ASIC Enforcement Review Taskforce (established in response to the Financial System Inquiry to review and assess ASIC's enforcement capability). The recommendations (50 in total) include increasing penalties for corporate misconduct. The Government generally agreed with those recommendations, supporting even stronger maximums (in the case of civil penalties) than recommended.
Amendments under the new Act
Imprisonment terms have been increased for a number of serious offences, originally to 10 years and subsequently to 15 years (following Senate amendments). The increase is stated as being intended to meet community expectations and to act as a deterrent, so as to further protect the community and maintain the integrity of the financial services sector (see table 1 below).
Criminal offences are to be introduced in addition to the existing strict and absolute liability offences, so that where fault can also be established, these offences should be treated as criminal offences and attract higher penalties (some including imprisonment). Some of these offences may previously have been overlooked as 'minor' given their characterisation as strict or absolute liability. With this new offence status, the circumstances and context of a contravention will become highly relevant (see table 2 below).
For offences that were only strict liability, imprisonment is no longer an available offence but the maximum financial penalties have been increased.
Civil penalty provisions:
The new increased civil penalty provisions are set out in table 3 below, with maximum penalties to become uniform across the financial services sector. Contraventions within this category of penalty can be imposed by Courts using civil procedure. This means that the level of proof required will generally be lower as easier to impose. These increased civil penalties will apply to a wider range of misconduct, including the obligation referenced throughout the Royal commission, for a licensee to act efficiently, honestly and fairly (see table 4 below).
Expanded infringement notice regime
The new infringement notice regime will apply to all existing strict and absolute liability offences (and certain civil penalty provisions) as an alternative to civil or criminal proceedings. A notice will require payment within 12 months, failing which ASIC may pursue proceedings against the relevant entity. Payment of the notice will protect the entity from further action and is not taken as an admission of guilt (see table 5 below).
A substantial penalty provision (in line with other increased penalties - table 3) has been introduced for the obligation (on the insurer) to act in utmost good faith in relation to matters arising under an insurance contract. However, it is left to ASIC to determine whether to apply for such a pecuniary penalty order (not the insured).
Other notable amendments:
'Dishonest' will have a prescribed meaning across the Corporations Act (rather than limited to financial services misconduct). The subjective element of the definition (that it is known to be dishonest) has also been removed so that it becomes a wholly objective test. This also lowers the onus of proof necessary to establish dishonesty.
Relinquishment has been introduced as a remedy for civil penalty proceedings. This is intended to ensure that the penalties are not 'weighed up' against any potential benefits that could be gained.
Removing an ambiguity that if an employee or officer dishonestly or recklessly uses their position or information known to them to gain an advantage, it will not matter if it causes a benefit (or detriment) to the corporation
Summary tables of changes
The following tables are a selection of the amendments and are not comprehensive.
Table 1: Obligations under increased maximum imprisonment (15 years) Act recklessly, or be intentionally dishonest, and fail to act in good faith in the best interests of the corporation and for a proper purpose. Financial records and audit obligations Registered scheme responsible entity obligations Securities fundraising without ASIC lodged prospectus Materially adverse misleading or deceptive statements in disclosure Providing defective disclosure Failing to pay client monies into proper account
Table 2: New criminal offences alongside strict and absolute liability offences
Notifying ASX of director shareholdings Maintaining financial records Audit requirements Failing to provide disclosure documentation False information Design and distribution obligations
Table 3: Maximum civil penalty provisions (current and new)
ASIC Act: Corporations Act:
$420,000 (based on 2,000 penalty units) $200,000
(Greater of) $1.05 million (5,000 penalty units); or 3 x benefit
Credit Act Insurance Act
$420,000 (based on 2,000 penalty units) $63,000 (based on 300 penalty units)
Company (current) $2.1 million (10,000 penalty units) $1 million
$2.1 million (10,000 penalty units) $2.1 million (10,000 penalty units)
Company (new) (Greater of) $10.5 million; or 3 x benefit; or 10% of 12 month turnover up to $525m (2.5 million penalty units).
Table 4: Obligations under new civil penalty provisions
General financial services licensee obligations General credit licensee obligations (including (including to act efficiently, honestly and fairly) to act efficiently, honestly and fairly).
Recovering in excess of twice the adjusted credit under small amount credit contracts
Retail client disclosure (FSG, SOA, defective PDS)
False or misleading representations
Harassment to apply for credit, including visiting homes
Registered to operate managed investment scheme
Complying with product intervention orders
Complying with a banning order
Design and distribution obligations Complying with product intervention orders (contingent) Table 5: Obligations under new Infringement notice provisions
Charging ongoing fees after arrangement cancelled
Provision of Key Facts Sheet
Certain ASIC notifications
Notification for exceeding credit card limit
Provision of retail disclosure documentation
Obligations relating to small amount credit contracts
Ban on conflicted remuneration
Use of certain words
Increasing margin loans without suitability assessment
The changes (except for those relating to laws not yet passed) are set to commence the day after the Act receives Royal Assent.
ASIC Enforcement principles
ASIC has also published a set of principles which are set to guide ASIC's approach to enforcement. Relevantly these include principles to help determine whether ASIC should litigate to achieve the above (increased) penalties. Where a possible breach is known to ASIC, if following an assessment ASIC is satisfied of a breach, ASIC will ask "why not litigate?". ASIC will also consider whether negotiating an outcome is appropriate, weighing this outcome against the public benefit of a judgment and imposition of a sentence.
There will also be an increased focus on both corporate accountability and individual accountability, particularly at executive and board level.
If you or your board have concerns with the new penalties regime and would like to discuss it, we encourage you to contact us.
Partner Howard.Fraser @bakermckenzie.com
Partner Guy.Sanderson @bakermckenzie.com
Partner Stephen.Watts @bakermckenzie.com
Special Counsel Yechiel.Belfer @bakermckenzie.com
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