INSIGHT

ASIC's change of tone in action

By Kim Reid, Natalie Oliver, Micaela Bassford
Financial Services Risk & Compliance

In brief 3 min read

ASIC's 'why not litigate?' approach to enforcement activities and its change in tone confirm the new era of regulatory engagement has arrived. In particular, its recent actions in the Federal Court place the waiving of legal professional privilege under the spotlight.

How does this affect you?

  • ASIC's recent actions indicate a tougher stance on its approach to notices to produce documents, namely:
    • a greater focus on prompt and thorough production within the specified timeframe by any entities receiving a statutory notice to produce documents; and
    • a more stringent interrogation of claims of legal professional privilege.
  • Whilst ASIC seeks a more stringent application of claims for legal professional privilege over documents it's seeking, the willingness to waive privilege must be weighed against the increased likelihood that enforcement litigation will follow an ASIC investigation.

Who else in your organisation needs to know about this?

Legal, risk and compliance teams need to be put on notice of ASIC's new approach, especially any operatives tasked with the receipt and prosecution of any notices to produce from the regulator. 

ASIC goes into battle

A recently published media release from ASIC reinforces the regulator's marked shift to a hard-line tone in connection with its investigation and enforcement activity. 

The release announced an agreement between ASIC and two respondents to Federal Court proceedings in which ASIC had sought orders compelling the production of documents that were the subject of claims for legal professional privilege. Heralding a stark change in tone, ASIC's media release described the dispute over the documents as a 'battle', and the agreement as a 'surrender' by the respondents.

The Federal Court proceedings were commenced by ASIC in December 2018 against a financial services institution and its external lawyers, seeking an order for the production of interview notes by the external law firm. The notes were caught by the terms of a compulsory notice to produce, which had been issued by ASIC under section 33 of the Australian Securities and Investments Commission Act 2001 in 2018, but were not produced to ASIC on the basis they were subject to a claim for legal professional privilege. The s33 notice had been issued by ASIC in connection with an investigation concerning certain 'fees for no service' allegations and related allegations concerning statements which had been made to ASIC.

During the course of the Federal Court proceedings, the financial institution dropped its claim for privilege over the documents, prompting the agreement between the parties to dismiss the proceedings with costs in favour of ASIC. The media release quotes ASIC Deputy Chair, Daniel Crennan QC, who declared:

ASIC is determined to take enforcement action against the major banks and financial service providers, and to use all legal powers necessary to investigate the significant issue of fees for no service…

ASIC's actions indicate a change in enforcement culture

'The starting point for consideration is, and must always be, that the law is to be obeyed and enforced… And, adequate deterrence of misconduct depends upon visible denunciation and punishment.'

Commissioner Hayne

These matters suggest ASIC is implementing its 'why not litigate' approach to enforcement, adopted in October 2018. Under that policy, ASIC put in place a series of measures to ensure a strong focus on court-based outcomes. Coupled with this, ASIC's change in tone reflects its desire to respond to, and embrace, recommendations from the report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Commissioner Hayne noted in that report that the 'starting point for consideration is, and must always be, that the law is to be obeyed and enforced… And, adequate deterrence of misconduct depends upon visible denunciation and punishment.'

While the relevant Federal Court proceedings here were not commenced to make any final determination on whether there had been misconduct, the way in which the privilege claims have been resolved, and the tone of the media release, suggest ASIC is continuing to take steps to focus on a change in enforcement culture.

Looking ahead: Legal Professional Privilege still valid, but under tighter review

ASIC's media release acknowledges some documents subject to notices issued under its compulsory information gathering powers may attract a valid claim for legal professional privilege. There is no change to the law in that area, and valid claims for privilege may continue to be made.

However, ASIC has indicated it expects entities to provide appropriate details to substantiate the basis of any privilege claim, and has foreshadowed court action going forward where it considers a document has been withheld from production on the basis of an inappropriate claim for privilege.

ASIC has also signalled it expects entities who receive a statutory notice to produce documents within the specified timeframe. This means recipients of notices need to move quickly to ensure all non-privileged documents caught by a notice are produced in a timely manner, and that proper consideration is given to claims for legal professional privilege.

In turn, recipients of notices need to understand the importance of ASIC's change of approach when deciding whether or not to waive claims for legal professional privilege. With ASIC determined to take a more robust approach to enforcement, co-operation with regulators by voluntarily waiving privilege also creates risk. Any decision to waive privileged material should be made having regard to the increased likelihood that enforcement litigation will follow an ASIC investigation.