In late September the Government released the Treasury Laws Amendment (ASIC Enforcement) 2018 Bill (Bill) seeking consultation from the public in relation to its proposed reforms. The Bill seeks to amend the Corporations Act, ASIC Act, Credit Act and the Insurance Contracts Act in response to a number of recommendations made in the ASIC Enforcement Review Taskforce report.
The amendments proposed by the Bill introduce a stronger penalty framework with an aim to deter misconduct and improve community confidence in the corporate and financial sector. The Treasurer, Hon. Josh Frydenberg MP, has stated that the “proposed changes would double maximum imprisonment penalties and significantly increase financial penalties for some of the most serious ‘white-collar’ criminal offences bringing Australia’s penalties in closer alignment with leading international jurisdictions.” The consultation period closed on 23 October 2018.
The ASIC Enforcement Review Taskforce
On 19 October 2016, the Government established the ASIC Enforcement Review Taskforce. The Taskforce was asked to review the enforcement regime available to ASIC and assess the suitability of the existing regulatory tools available to ASIC to perform its functions. The Taskforce made a series of recommendations, including to enhance the requirement for financial services and credit licensees to report significant breaches to ASIC, strengthen ASIC’s licencing powers and extend ASIC’s powers to ban individuals from managing financial services businesses.
The Taskforce also recommended implementing a stronger penalty framework. It separated this into two broad categories:
- the quantum of penalties, i.e. increasing civil and criminal penalty amounts including terms of imprisonment
- the penalty ‘pathways’ or the scope of provisions determined by legislation to attract civil or criminal penalties or some form of administrative sanction.
On 16 April 2018, the Federal Government agreed to all the recommendations made, except the maximum civil penalty amounts, where the Federal Government considered a stronger response was necessary.
Key proposed changes
The key amendments which are made by the Bill include:
- updating the penalties for certain criminal offences in ASIC administered legislation, including:
- increasing the maximum imprisonment penalties for certain criminal offences (for example, the most serious offences in the Corporations Act have their maximum term of imprisonment increased from five years to 10 years)
- introducing a formula to calculate financial penalties for criminal offences to ensure a simplified and consistent approach
- removing imprisonment as a penalty and increasing the financial penalties for all strict and absolute liability offences (the Taskforce concluded that individuals should not be subject to imprisonment for inadvertent breaches of the law or offences where there is no fault element)
- introducing ordinary criminal offences that sit alongside strict and absolute liability offences. This amendment recognises that some existing strict and absolute liability offences should be treated as an ordinary criminal offence if the fault elements can be established, and as a result, a higher penalty should be imposed
- modernising and expanding the civil penalty regime by increasing financial penalties for contraventions and making a wider range of offences subject to civil penalties
- harmonising and expanding the infringement notice regime
- introducing a new test that applies to all dishonesty offences under the Corporations Act. This amendment addresses the lack of a consistent definition of ‘dishonest’ in the Corporations Act by introducing a specific definition that applies across the Act. The definition is an objective only test, and as such, it is not necessary to prove that a defendant knew that the relevant conduct was dishonest. Instead, to establish dishonesty, it is only necessary to prove that the conduct is dishonest according to the standards of ordinary people
- introducing relinquishment as a remedy available in civil penalty proceedings (a relinquishment order is a mechanism to prevent the unjust enrichment of those who contravene the act by removing any financial benefits that arise)
- clarifying that the courts are to give priority to compensating victims who suffer damage as a result of a contravention of a civil penalty provision in the Corporations Act
- clarifying that contraventions of section 184 of the Corporations Act can occur even when the relevant corporation gains an advantage from the contravention. This amendment ensures that those who use their position or information dishonestly or recklessly, but gain an advantage for the corporation, still commit the offence.
Room for improvement?
According to ASIC’s annual report for the 2017-18 financial year (Annual Report), the market which ASIC regulates has:
- over 2,171,544 businesses operating
- $1.8 trillion domestic equity market capitalisation (as at May 2017)
- 6.9 million adult Australians owned listed investments
- $2.9 trillion held in managed funds
- raised $7.4 billion through IPOs.
The Annual Report provides that during the 2017/18 financial year, ASIC achieved the following through its actions:
- 22 criminal convictions
- $42.2 million in civil penalties
- 50 director disqualifications/removals
- $2 million in infringement notices.
When comparing ASIC’s achievements as against the priorities of the Bill, it may suggest that ASIC requires further frameworks to achieve their overall objective of reducing corporate and financial sector misconduct. As an example, the impact of increasing the penalties for criminal offences may not achieve the reach ASIC requires given the nominal 22 criminal convictions within the 2017/18 financial year.
While the Bill is a step in the right direction of re-instilling consumer confidence in the corporate and financial sector, it is a long path to achieve the cultural change in the industry that will reinforce the theoretical concepts that ASIC ideally seeks to achieve through this amendment.
What do we hope to see more of?
Realistically, the reach of ASIC’s Taskforce is limited based on their capacity and funding. Given the size of the market ASIC is regulating and the objectives set out in ASIC’s 2017/18 Corporate Plan, it is surprising the Bill does not address further protections of those who can assist achieve ASIC’s overall objectives. As a result, what we hope to see is further protections for whistle-blowers and more practical consequences for wrong-doers (such as market bands or restrictions, rather than mere financial penalties).