The Federal Government has released draft legislation for public comment aimed at strengthening ASIC’s enforcement and supervision powers relating to search warrants, access to telecommunications intercept material, licensing and banning orders.
The draft legislation responds to some of the recommendations made by the ASIC Enforcement Review Taskforce (Taskforce). In December 2017, the Taskforce undertook a review of ASIC’s enforcement regime, making 50 recommendations. Interestingly, in April 2018 the Government responded to the Taskforce’s report and agreed, or agreed in principle, to all the recommendations; however, the Government has been relatively slow in legislating these recommendations.
Compelled by the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), the Government has since included legislation in response to some of the Taskforce’s recommendations as part of its Restoring Trust in Australia’s Financial System roadmap, which set out timelines for various Government actions in response to the Royal Commission.
Below, we consider some of the key features of the draft legislation, which can be found here.
Draft legislative amendments
Strengthening ASIC’s Australian Financial Services Licence (AFS Licence) powers. The current requirement that applicants for an AFS Licence are of ‘good fame and character’ is to be replaced with a ‘fit and proper’ test. The amendments align the AFS licencing regime with the Australian Credit Licencing regime (Credit Licence), which has had a ‘fit and proper’ test for a number of years. The ‘fit and proper’ test under both the AFS Licence and Credit Licence regimes is to be extended to all officers, partners or trustees of the applicant, as well as controllers. The amendments also include an ongoing requirement that the licensee, its officers, or controllers continue to satisfy the ‘fit and proper’ test.
The issue of whether there should be a controller test in respect of AFS Licence or Credit Licence applications was first introduced by the Financial Systems Inquiry in 2014 and has been a topic of consultation and debate since. The issue was unresolved, but the amendments will introduce a threshold test that requires an applicant’s controllers be assessed as ‘fit and proper’ under both the AFS Licence and Credit Licence regimes. This has the potential to create headaches for some applicants with controllers who have any history of regulatory misconduct.
Improvements to the AFS Licence and Credit Licence regimes. These improvements ensure that ASIC has access to adequate information in relation to an application or a licence, ensure that ASIC can refuse to grant a licence when a material particular in an application is false or misleading, and ensure that a licence can be suspended or revoked in certain circumstances (including where the financial services authorised by the licence have not been provided within six months of the licence being granted).
The amendments also align penalties for making false or misleading statements in documents provided to ASIC in both the AFS Licence and Credit Licence contexts. The amendments rewrite the existing provisions about false or misleading statements in section 1308 of the Corporations Act and false and misleading documents in section 225 of the Credit Act. The re-written provisions of the Acts are now closely aligned. The amendments introduce new civil penalty provisions that mirror the fault-based and strict liability offences.
Expanding the grounds on which ASIC can issue banning orders. ASIC has existing grounds to issue banning orders. The amendments authorise ASIC to make a banning order where the person is ‘not fit and proper’ or is ‘not adequately trained’ and extends these grounds to also apply to officers or controllers of financial services and credit businesses. In addition, ASIC may issue banning orders to ‘a person [that] has failed to comply with an AFCA determination’ or ‘an officer of a corporation that was unable to pay its debts’ in respect of financial services or credit businesses.
The amendments also empower ASIC to make additional types of banning orders to prohibit a person from controlling or performing any or particular functions in relation to a financial services or credit business.
Harmonising and enhancing ASIC’s search warrant powers. ASIC has extensive powers of investigation. To carry out its investigative and enforcements function, ASIC may apply for search warrants. In its report, the Taskforce found that there were a number of inconsistencies and deficiencies in ASIC’s existing search warrant powers. Under existing law, ASIC’s search warrant powers are contained across various legislation. The amendments seek to consolidate ASIC’s search warrant powers into the ASIC Act and Credit Act.
Further, the amendments align ASIC’s powers with the Crimes Act 1914 (Cth) (Crimes Act). Previously, ASIC’s search warrant powers applied only to ‘specified books’. Under the amendments, ASIC can now seize a broad range of ‘evidential material’, meaning ASIC is able to seize other material relevant to the particular offence.
A practical benefit of aligning the ASIC Act with the Crimes Act is that ASIC is no longer restricted to only using materials seized pursuant to a Crimes Act search warrant in criminal investigations, and can keep evidential material seized under the search warrant in performing its duties and functions.
Access to telecommunications interception information. Currently, only the police, the Australian Security Intelligence Organisation and anti-corruptions bodies (Interception Agencies) can obtain a warrant for the interception of telecommunications information. Under specified legislation, Interception Agencies can share this information with other bodies, such as Commonwealth Royal Commissions. The amendments extend those circumstances so that the chief officer of an interception agency can provide either interception warrant information or lawfully intercepted information to an ASIC staff member where the information relates, or appears to relate, to a serious offence that ASIC can investigate.
The receipt of intercepted information will complement ASIC’s existing power to access stored communications (such as SMS or email), so that ASIC has more evidence at its disposal when investigating serious offences. In practice, this could mean ASIC will be reviewing recorded telephone calls when investigating serious offences, such as market manipulation or insider trading.
ASIC has always had broad powers of investigation and information-gathering where there has been reason to suspect certain contraventions of the law or unacceptable circumstances. The draft legislation seeks to strengthen those powers by removing limitations on ASIC’s current search warrant powers and granting access to lawfully intercepted information.
The draft legislation also emboldens ASIC’s enforcement powers by expanding the scope of banning orders and aligning the penalties for false and misleading statements in the AFS Licence and Credit Licence regimes. It appears the legislative intent behind the draft legislation is to allow ASIC to cast a wider net in its investigations of suspected wrongdoers, and once its investigations have completed, have stronger powers to impose administrative sanctions.
The draft legislation is currently open to consultation up until 9 October 2019 and interested parties are invited to comment on this consultation.