ASIC recommends tougher corporate penalties

By Belinda Thompson
Banking Corporate Governance Financial Services Litigation

In brief

The ASIC Enforcement Taskforce's latest consultation paper pushes for a tougher penalty regime for corporate and financial sector misconduct, which has been the key focus of the Taskforce's Terms of Reference, and indeed of ASIC's reform agenda for some time. Partner Belinda Thompson, Senior Associate Michela Agnoletti and Associate Katie Gardiner look at what the consultation paper proposes. 

The Taskforce considers that the current penalty regime is:

  • 'inadequate' to address the 'severity of misconduct';
  • has penalties that are 'too low' to act as a 'credible deterrent'; and
  • in some instances, inconsistent with penalties for equivalent Commonwealth and state provisions.

The Taskforce's position on a tougher penalty framework is as follows.

Civil penalties – increasing maximum civil penalties and extending the remedies available to ASIC under the legislation it administers, reflecting the seriousness of these offences and bringing them broadly into line with similar regimes overseas and of other domestic regulators. In summary:

  • Maximum penalties – maximum civil penalties for individuals will be increased to 2500 penalty units ($525,000) and for corporations the greater of:
    • for contraventions under the Corporations Act 2001 and Credit Act 1984,12,500 penalty units ($2.265 million) and for contraventions under the ASIC Act 2001, 50,000 penalty units ($10.5 million);
    • three times the value of benefits obtained or losses avoided; or
    • 10 per cent of the company's annual turnover preceding the contravening conduct.
  • Disgorgement remedies – making available as a remedy the disgorgement of financial benefits in civil proceedings brought by ASIC under the Corporations Act, Credit Act and ASIC Act to reduce the likelihood of wrongdoers treating civil penalties as 'the cost of doing business'. This may also apply if the person is liable for a pecuniary penalty order.
  • Priority for compensation – amending the Corporations Act so that, like under the ASIC Act and Credit Act, the courts must give preference to making a compensation order where a defendant does not have sufficient resources to pay both a pecuniary penalty order and a compensation order.
  • Extension of civil penalty consequences – extending civil penalty consequences to a handful of further provisions under legislation that ASIC administers. The Taskforce suggests a further list of provisions that may be suited to a civil penalty remedy, including section 180 of the Corporations Act (directors' and officers' duty of care and diligence).

Strict and absolute liability offences – removing imprisonment as a sanction for strict and absolute liability offences in the Corporations Act and introducing ordinary offences based on these offences. This reflects the Taskforce's view that imprisonment is not an appropriate sanction for strict and absolute liability offences, but that certain current strict and absolute liability offences should be treated as criminal offences if a fault element is present (punishable by a fine and/or imprisonment term) where appropriate. The Taskforce proposes a minimum pecuniary penalty for strict and absolute liability offences of 20 penalty units for individuals ($4200) and 200 penalty units for corporations ($42,000).

Criminal penalties – increasing maximum penalties across the board under the Corporations Act. For example, increasing criminal penalties:to 4500 penalty units for individuals ($945,000) and 45,000 penalty units ($9.45 million) for corporations for breach of director duties obligations (s184).

  • from 200 to 600 penalty units for individuals ($42,000 to $126,000) and from 1000 to 6000 penalty units ($210,000 to $1.26 million) for corporations for breach of continuous disclosure obligations.
  • from 200 to 4500 penalty units for individuals (from $42,000 to $945,000) and from 1000 to 45,000 penalty units ($210,000 to $9.45 million) for corporations for defective disclosure to consumers.

As well as increasing criminal penalties, a single dishonesty test will apply across dishonesty offences under the Corporations Act. Presently, Commonwealth law does not have a consistent definition of dishonesty.

Credit Code provisions – seeking stakeholder input on whether a handful of provisions in the Credit Code should be made civil penalty provisions as alternatives to the remedies under those provisions (being, for example, suspending or cancelling credit licences). The Taskforce considers that this will enable ASIC to adopt a more flexible and proportionate response to misconduct.

Insurance Contracts Act 1984 (ICA) – broadening ASIC's powers under the ICA to regulate the conduct of insurers by extending civil penalty consequences to breaches of s13(1) (duty to act in utmost good faith) and s33C (insurer's obligation to provide a key facts sheet).

Infringement notices – extending the infringement notices that ASIC can issue to certain civil penalty offences under the Corporations Act, the Credit Act and the Credit Code to arm ASIC with an additional regulatory tool for certain lower level breaches. The paper sets out a list of current and proposed civil penalty provisions and seeks stakeholder views as to whether they are suitable for infringement notices. Further, the Taskforce's preliminary position is that infringement notices should be set at 12 penalty units for individuals and 60 penalty units for corporations (other than for existing infringement notice provisions where the penalties are higher, that should remain unchanged). However, the Taskforce also seeks stakeholder views on whether a ratio-type regime, similar to that under the Credit Act, is more appropriate (even though this will result in higher infringement notice amounts).

Financial Services and Credit Panel – establishing a Financial Services and Credit Panel to make administrative banning decisions in relation to financial services and credit activities, including whether to ban individuals from providing financial services or credit and possibly issue infringement notices or accept enforceable undertakings. The Panel would operate in conjunction with ASIC's current administrative action processes.

The outgoing ASIC Chairman, Greg Medcraft, once memorably asserted that Australia is a 'paradise' for white-collar criminals because of its 'soft' penalties for corporate offences. It is clear that if the paper's recommendations were adopted, ASIC's enforcement toolkit to target corporate misconduct would be greatly strengthened.

The Taskforce has invited submissions in response to its consultation paper, by 17 November 2017 and is set to report to the Government on the Terms of Reference sometime this year. We will be watching this space closely.