INSIGHT

Treasury proposes tougher penalties for corporate and financial sector misconduct

By Simun Soljo
Banking Corporate Governance Financial Services Risk & Compliance

In brief

The Federal Government has released exposure draft legislation for public consultation that, if enacted, will implement many of the recommendations of the ASIC Enforcement Review Taskforce to strengthen the penalty regime for corporate and financial sector misconduct. Partner Simun Soljo and Lawyer Roseanna Bricknell take a look at the proposed laws.

Background

The Federal Government has released exposure draft legislation to implement some of the recommendations made by the ASIC Enforcement Review Taskforce to strengthen penalties for corporate and financial sector misconduct, following the Taskforce's finding that the current penalty regime is 'inadequate' for addressing the 'severity of misconduct' or act as a 'credible deterrent'.

In April 2018, the Federal Government accepted all 50 recommendations of the Taskforce, and the Treasurer and Minister for Revenue and Financial Services announced that the Government would increase both civil and criminal penalties for white collar misconduct. The proposed changes are set out in the exposure draft legislation.

The proposed changes

Criminal penalties: The maximum penalties (both imprisonment and financial penalties) for certain criminal offences under the Corporations Act, ASIC Act and Credit Act will be increased.

  • The maximum term of imprisonment for individuals will be raised. For serious offences, the term will be increased from five to 10 years, and terms will also be raised for a number of less-serious offences.
  • Financial penalties will also be increased. For serious offences (defined as offences for which the maximum term of imprisonment is 10 years or greater), financial penalties will be:
    • for individuals:
      • the greater of 4,500 penalty units ($945,000); or
      • three times the benefit derived from (or detriment avoided by) the contravention; and
    • for bodies corporate:
      • the greater of 45,000 penalty units ($9.45 million);
      • three times the benefit derived from (or detriment avoided by) the contravention; or
      • 10 per cent of annual turnover.

Financial penalties for less serious criminal offences will also be introduced.

Serious criminal offences include breaches of directors duties (s184), failure to comply with certain financial reporting and audit obligations (s344), and the provision of defective disclosure documents (s925D, s925F and s1021D).

Changes will also be made to penalties for strict and absolute liability offences, for which imprisonment will no longer be a penalty. Instead, financial penalties have been increased for these types of offences. However, new ordinary criminal offences for the same conduct will be introduced to sit alongside certain strict and absolute liability offences, and these ordinary offences will attract imprisonment.

Civil penalties: The maximum civil penalties for white collar offences will be significantly increased, and a greater number of offences are now subject to the civil penalty regime.

  • The maximum pecuniary penalty for individuals will be increased to:
    • for individuals:
      • the greater of 5,000 penalty units ($1.05 million); or
      • three times the benefit derived from (or detriment avoided by) the contravention; and
    • for bodies corporate:
      • the greater of 50,000 penalty units ($10.5 million);
      • three times the benefit derived from (or detriment avoided by) the contravention; or
      • 10 per cent of annual turnover, up to a maximum value of 1 million penalty units ($210 million).
  • The civil penalty regime will also be extended to cover a wide range of provisions in financial services laws, including:
    • the s912A general obligations under the Corporations Act on Australian Financial Services Licensees, and the significant event notice requirements under s912D;
    • the general obligations of credit licensees imposed by s47 of the Credit Act;
    • the duty to act in utmost good faith and the obligation to provide a key facts sheet imposed by s13(1) and s33C(1) of the Insurance Contracts Act; and
    • a range of other provisions of the Corporations Act and Credit Code.

Infringement notices: The existing Infringement Notice regime currently applicable to provisions of the ASIC Act and Credit Act will be extended to include:

  • all strict and absolute liability offences in the Corporations Act, along with other prescribed offences and civil penalty provisions in that Act;
  • certain additional provisions of the Credit Act; and
  • s33C of the Insurance Contracts Act.

The penalties payable under an Infringement Notice will vary depending on the type of provision:

  • For most offences (including strict and absolute liability offences), the maximum penalty payable will be half of the maximum pecuniary penalty payable for that offence.
  • For most civil penalty provisions, the maximum penalty payable will be 12 penalty units for individuals ($2,520) and 60 penalty units for corporations ($12,600).
  • For Credit Act offences, the maximum amount payable is one fifth of the maximum penalty for that offence, and for Credit Act civil penalty provisions, the maximum amount payable will be 50 penalty units for individuals ($10,500) and 250 penalty units for bodies corporate ($52,500).

Relinquishment orders: Also known as disgorgement, the draft legislation provides for orders to be made for relinquishment of any financial benefit gained from conduct that contravenes a civil penalty provision.

Dishonesty: A new definition of 'dishonesty' will be introduced, that will apply to all relevant offences under the Corporations Act. The new test incorporates the single limb test from Peters v R (1998) CLR 493, which sets out that conduct is dishonest if it is 'dishonest according to the standards of ordinary people'.

Priority for compensation: The draft Bill proposes amendments to ensure that when orders are made in respect of breaches of civil penalty provisions, 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.

What's next?

Submissions in response to the consultation paper are due by 23 October 2018.

We expect that further reforms to corporate and financial sector regulation will follow, including in response to ASIC's recent findings concerning breach reporting and the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, expected to be finalised by February 2019.

The new normal will be increased scrutiny not only of whether corporates and financial services providers are complying with their obligations, but also how ASIC and other corporate regulators are enforcing the law. So watch this space closely for additional legislative developments and increased action from ASIC, and how it will choose to make use of the new tools it is being given to police the financial sector.