Penalties for corporate and financial sector misconduct 10 min read
New legislation that greatly increases penalties for corporate and financial sector misconduct will have wide-ranging and significant effects. Partner Alex Mason, Managing Associate Chris Kerrigan and Associate Rachele Troup report.
How does it affect you?
- Following the Financial Services Royal Commission's final report, both Houses of Parliament have passed the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Cth) (the Penalties Bill). The Penalties Bill amends the Corporations Act 2001 (Cth) (the Corporations Act), ASIC Act 2001 (Cth) (the ASIC Act), National Consumer Credit Protection Act 2009 (the Credit Act) and Insurance Contracts Act 1984 (Cth) (the Insurance Act) to consolidate the penalties framework in these Acts, expand the civil penalty regime to new provisions, and introduce stronger penalties for bodies corporate and individuals.
- Going forward, corporations, financial institutions and individuals will face far greater financial exposure for misconduct under the Acts covered by the Penalties Bill. Individuals will also face longer prison sentences for criminal offences. These changes will not apply to historic conduct that takes place before commencement of the Penalties Bill.
- For corporations and financial institutions, the increase in severity of financial consequence will have a number of impacts on decision-making, particularly when paired with ASIC's new 'why not litigate' policy. Compliance and regulatory risk assessments that use maximum penalties under the old regime to measure impact will need to be revisited; further thought will need to be given to whether appropriate prioritisation has been given to risk and compliance; the consequences of not investigating matters diligently, or not cooperating with ASIC and other authorities, will become starker; and allegations of misconduct involving the provisions covered by the Penalties Bill are likely to more often lead to market disclosures and higher provisioning than is currently the case.
- The civil penalty regime has been expanded, most notably to the duties under section 912A (the duty of financial services licensees to provide financial services efficiently, honestly and fairly) and s912D (breach reporting) of the Corporations Act. So too has the availability of infringement notices. A new power to issue a relinquishment order (ie disgorgement of profits) has also been created. From a tactical perspective, these provisions will give ASIC more enforcement options, and will make it easier for it to prove breaches of core provisions such as ss 912A and 912D of the Corporations Act. This is likely to lead to more civil proceedings being instituted by ASIC.
- The Penalties Bill removes the subjective limb of the dishonesty test under the Corporations Act, making it easier for the prosecution to prove dishonesty. As a consequence, we expect to see more prosecutions under offences that rely on this concept (such as s1041G of the Corporations Act).
The Penalties Bill implements 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 'seriousness of misconduct' or in acting as a 'credible deterrent'.1 ASIC has already released a media release stating that it will 'shortly be able to pursue harsher civil penalties and criminal sanctions against banks, their executives and others who have breached corporate and financial services law' as a result of the Penalties Bill.
The key changes made by the Penalties Bill can be divided into the following categories:
- increase in severity of penalties for criminal offences for individuals and bodies corporate;
- increase in severity of penalties for civil breaches for individuals and bodies corporate;
- increase in scope of the civil penalty regime, to cover new provisions;
- increase in the range of scenarios for which infringement notices can be issued; and
- lowering of the threshold for establishing 'dishonesty' under dishonesty offences under the Corporations Act.
We summarise these changes below. Importantly, the changes to criminal and civil penalties will only apply to conduct that occurs wholly on or after commencement of the Penalties Bill (the day after Royal Assent is received).2 Infringement notices can be given in relation to conduct that occurred before commencement.3 The new definition of dishonesty applies only to the commission of an offence that occurs wholly on or after commencement.4
The maximum penalties for certain criminal offences under the Corporations Act, ASIC Act, Credit Act and Insurance Act will be increased.
For serious criminal offences in the Corporations Act, the term of imprisonment has been increased to 15 years. (Currently, only a small number of offences carry a maximum penalty of 10 years' imprisonment, such as the prohibition on dishonest conduct in relation to financial services in the Corporations Act (s1041G)5 with most others carrying a maximum sentence of five years).6
These serious criminal offences include certain offences that can be committed by directors in relation to acting in bad faith, abuse of position or information (s184), failure to comply with certain financial reporting and audit obligations (s344), engaging in dishonest conduct in relation to financial services (s1041G), and the provision of defective disclosure documents (ss 952D, 952F and 1021D).
A range of less serious criminal offences have also had their associated imprisonment terms increased.
Pecuniary penalties for serious criminal offences will also be increased under the Corporations Act, Insurance Act and Credit Act:7
|New penalty regime||Previous penalty regime|
||Previously, most of these offences carried a maximum penalty of 2000 penalty units ($420,000).|
|Bodies corporate||Greater of:
Previously, a body corporate convicted of an offence under the Corporations Act could generally only be fined five times the maximum penalty for an individual (with limited exceptions).8
Under the ASIC Act, a body corporate could be fined a maximum of 10,000 penalty units ($2,100,000).9
No equivalent provisions previously existed under the Insurance or Credit Acts.
Financial penalties for less serious criminal offences (those with a prison term of less than 10 years) in the Corporations Act, Credit Act and ASIC Act will now be calculated by a formula of calculating the number of months of the sentence multiplied by 10 for individuals and bodies corporate (or where there is a specified fine, that number multiplied by 10 for the body corporate).10 Previously, there was no harmonious approach to calculating penalties under any of the Acts.
The maximum civil penalties under the Corporations Act, Credit Act and ASIC Act will also be increased significantly.11
|New penalty regime||Previous penalty regime|
Up to $200,000 under the Corporations Act.12
Between 50 ($10,500) and 2000 penalty units ($420,000) under the ASIC Act.13
Up to 2000 penalty units ($420,000) under the Credit Act.
|Bodies corporate||Greater of:
Up to $1 million for a body corporate under the Corporations Act.14
Between 150 ($31,500) and 10,000 ($2,100,000) penalty units under the ASIC Act.15
Up to 2000 penalty units ($2,100,000) under the Credit Act.
The civil penalty regime will be extended to cover a wider range of provisions in financial services laws, including:16
- the s912A general obligations of Australian financial services licensees (AFSL holders) under the Corporations Act;
- the obligation on AFSL holders to lodge breach reports with ASIC under s912D of the Corporations Act;
- the disclosure requirements in Chapter 7 of the Corporations Act;
- 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 Act; and
- a range of other provisions of the Corporations Act and Credit Act.
The above provisions will be subject to the new civil penalty calculation formulas, as set out above.
The Penalties Bill expands the existing infringement notice regime to include all strict and absolute liability offences in the Corporations Act, along with other prescribed offences and civil penalty provisions in that Act. It will also extend to include:
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.19
- For most civil penalty provisions, the maximum penalty payable will be 12 penalty units for individuals ($2520) and 60 penalty units for corporations ($12,600).20
- 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).21
Also known as disgorgement, the Penalties Bill provides for orders to be made for relinquishment of any financial benefit gained from conduct that contravenes a civil penalty provision.22 The Penalties Bill allows for a court to make a relinquishment order in relation to the contravention of a civil penalty provision even if a pecuniary penalty order could be, or has been, made.23
A new definition of 'dishonesty' will be introduced under s9 of the Corporations Act, which will apply to all relevant offences under the Corporations Act (including s1041G). The new test for dishonesty is a 'single limb' test, as set out in Peters v R (1998) CLR 493, which states that conduct is dishonest if it is 'dishonest according to the standards of ordinary people'. It will no longer be necessary to prove that the conduct was known by the person to be dishonest, according to the standards of ordinary people.
Key provisions affected by this change will be s1041G (the general prohibition on dishonest conduct in relation to financial services) and s1041F (inducing persons to deal).
The new legislation amends the law 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/or a relinquishment order as well as a compensation order.24
The Penalties Bill does not incorporate all changes recommended by the ASIC Enforcement Review Taskforce. Notably, ASIC has publicly stated that it is still waiting for s912D to be amended to incorporate an objective (rather than subjective) test to make it easier to prosecute or pursue civil breaches under that provision.25
Other changes recommended by the Enforcement Review Taskforce (not yet introduced, but accepted by the Federal Government) include ASIC's powers to access telecommunications intercept material and the introduction of a breach reporting regime for credit licensees.
Please do not hesitate to get in touch with our team to discuss how the above changes affect your business.
- ASIC, 'ASIC Enforcement Review Taskforce Report' (December 2017) available at <https://static.treasury.gov.au/uploads/sites/1/2018/04/ASIC-Enforcement-Review-Report.pdf>.
- Penalties Bill, sch1, s1656 - s1666; sch 2, s321-322; sch 3, s2-3.
- Penalties Bill, sch 1, s1659; sch 2, s323; sch 3, s4.
- Penalties Bill, sch1, s1660.
- Corporations Act, sch 3, item 310.
- Corporations Act, sch 3; Explanatory Memorandum, Penalties Bill, 13-14.
- Penalties Bill, sch 1, s1311C(3); sch 2, s93E(3); sch 3, s288D(3). The formula does not apply to the Insurance Act.
- Corporations Act, s1312. Sections 1041A and 1041D, subsections 1041B(1), 1041B(1), 1041C(1), 1041E(1), 1041F(1), 1041G(1), 1043A(1) and 1043A(2) already specify penalties in line with the new penalty regime: see Corporations Act, sch 3, item 310.
- ASIC Act s12GB(3).
- Penalties Bill, sch1, s1311B(3); sch 2, s93D(3); sch 3, s288C(2). The formula does not apply to the Insurance Act.
- Penalties Bill, sch 1, s1317G(3) and (4); sch 2, s12GBCA; sch 3, s167B; sch 4, s75D.
- Corporations Act, s1317G.
- ASIC Act, s12GBA.
- Corporations Act, s1317G. Note – separate rules applied for penalties imposed in relation to breach of market integrity rules, financial benchmark rules and derivatives trading rules.
- ASIC Act, s12GBA.
- Penalties Bill, sch 1, s1317E.
- Penalties Bill, sch 3, s47.
- Penalties Bill, sch 4, s33C.
- See eg Penalties Bill, sch 1, s1317DAP(2)(a).
- See eg Penalties Bill, sch 1, s1317DAP(2)(b).
- Penalties Bill, sch 3, s288L(2)(a).
- Penalties Bill, sch 1, s1317GAB; sch 2, s12GBCC; sch 3, s167C.
- See eg Penalties Bill, sch 1, s1317GAB.
- Penalties Bill, sch 1, s1317QF; sch 2, s12GCA; sch 3, s181.
- Evidence to Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, Canberra, 19 October 2018, 12 (Mr Daniel Crennan QC).