Pressing ahead with 'why not litigate?' 7 min read
Yesterday ASIC published its Corporate Plan for 2020-24, which sets out ASIC's strategic priorities and actions for the next four years. The Plan provides useful insights into ASIC's likely areas of focus and its approach to its supervisory, surveillance and enforcement functions, and how each of those may have been impacted by the COVID-19 pandemic.
The near-term: ASIC will focus a significant portion of its work on actions to address the impact of the pandemic. They include protecting vulnerable consumers, promoting market stability and resilience and taking enforcement action against the most harmful conduct. We expect to see continued focus on financial advice, complaints handling and remediation by banks, insurers and superannuation funds, together with a focus on compliance with continuous disclosure obligations.
Longer term: In addition to a focus on economic recovery, ASIC will return to a 'why not litigate' approach to enforcement and a focus on risk management. Businesses should expect that any abatement in enforcement actions by ASIC during the pandemic will be short-lived. In particular, ASIC intends to focus on misconduct connected with product design and mis-selling, superannuation, predatory lending and misconduct by individual directors and professional service providers (including auditors).
- We are not yet back to business as usual, but ASIC has resumed many of its activities that were temporarily disrupted by the pandemic. This includes its work to implement the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission).
- During the COVID-19 pandemic, ASIC is focusing its enforcement activities on the most egregious misconduct, and conduct that harms vulnerable consumers (eg consumers facing increased financial stress that may exacerbate their vulnerability to predatory lending, misleading and deceptive conduct or scams). However, we expect to see ASIC's enforcement ramp up post-pandemic as ASIC returns to its 'why not litigate' approach.
- ASIC has identified a longer-term focus on reducing misconduct by company directors, including by ensuring that individual accountability for company directors and officers is given appropriate attention in its investigations. This is consistent with the broader trend we have seen toward a focus on individual accountability, including the proposed introduction of the Financial Accountability Regime which ASIC will co-regulate with APRA.
- ASIC is continuing to work on previously prioritised enforcement matters such as those arising from the Financial Services Royal Commission. Other priority enforcement areas include superannuation, poor product design and mis-selling, and using ASIC’s powers or provisions that carry new or higher penalties (such as 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).
- The Plan consolidates ASIC's renewed focus on enforcement and supervision that it announced in 2018. ASIC estimates it will spend approximately 45% of its estimated 2020-21 budget of $471 million on enforcement activities, and a further 26% on supervision and surveillance activities.
As outlined in its Interim Corporate Plan 2020–21 (published in June 2020), ASIC's five strategic priorities to address the impact of the COVID-19 pandemic are:
- protecting consumers from harm at a time of heightened vulnerability (eg protecting consumers suffering financial hardship from scams and false advertising, predatory lending and the impacts of consumers having taken advantage of recent COVID-19 early superannuation access provisions);
- maintaining financial system resilience and stability, including importantly once federal and state government relief is wound back;
- supporting Australian businesses to respond to the effects of the COVID-19 pandemic, both in terms of the challenges and opportunities it has presented;
- continuing to identify, disrupt and take enforcement action against the most harmful conduct. This includes opportunistic misconduct seeking to exploit the COVID-19 environment and conduct related to market disclosures (including failure to disclose negative information and misleading market announcements made to ASX). Whilst ASIC remains focused on risk and governance, in terms of enforcement ASIC is presently focusing on 'egregious governance failures'; and
- continuing to build ASIC's organisational capacity, including by developing ways to hold examinations and interviews remotely, to resume or adjust suspended work in the months to come and to explore new technologies (eg data analytics and social media tools).
ASIC expects these priorities will remain a central focus in the near term.
ASIC's Corporate Plan for 2020-24 continues ASIC's focus from its 2019-2023 Corporate Plan on:
- changing behaviours to drive good consumer and investor outcomes;
- acting against misconduct to maintain trust and integrity in the financial system;
- promoting strong and innovative development of the financial system; and
- helping Australians to be in control of their financial lives.
To achieve this, ASIC's longer-term focus areas will include:
- promoting confident participation in the financial system to support long-term economic recovery;
- deterring poor behaviour and misconduct through its ‘why not litigate?’ approach and driving cultural change using all of its regulatory tools;
- improving entities’ management of key risks to prevent and mitigate harms to consumers and promote a healthy financial system and economic growth;
- addressing consumer harm as a result of elevated debt levels and hardship, with a focus on predatory lending;
- reducing poor product design and restricting mis-selling;
- reducing misconduct by company directors and professional service providers, particularly criminal conduct; and
- delivering as a conduct regulator for superannuation.
Further detail on these focus areas and the particular conduct and industries upon which ASIC intends to focus is provided below.
1 - Changing behaviours to drive good consumer and investor outcomes
ASIC will focus on disclosure and reporting practices, timely and accurate breach reporting, approaches to internal dispute resolution and timely remediation where losses have resulted from poor conduct.
ASIC will pursue these focus areas through a range of regulatory tools, including:
- new tools and powers (including its product intervention power, in relation to which it recently released a new Regulatory Guide);
- continuing to engage with regulated entities through its Close and Continuous Monitoring program and governance work (including examining whether disclosures in corporate governance statements are effective in promoting a more informed market and better and transparent governance practices);
- preparing for and implementing the Financial Accountability Regime and co-regulating the regime with APRA;
- taking high deterrence-based enforcement action, particularly using ASIC’s powers or provisions that carry new or higher penalties; and
- ensuring financial services providers satisfy appropriate standards of resources, competence and systems to operate efficiently, honestly and fairly.
ASIC has more than 20 new and continuing projects that form part of its focus in this area, including cross-sector projects (eg the Close and Continuous Monitoring and remediation projects), and projects focussed on financial advisers, investment managers, superannuation, insurance, and credit, retail banking and payments.
2 - Acting against misconduct to maintain trust and integrity in the financial system
We should not expect any dip in ASIC enforcement action to continue beyond the immediate impacts of COVID-19. ASIC has confirmed its commitment to a 'why not litigate' approach and to the importance both of justice being done and being seen by consumers to have been done. ASIC's enforcement priorities include:
- case studies and referrals arising from the Financial Services Royal Commission;
- misconduct relating to superannuation and insurance;
- matters that engage ASIC’s powers or provisions that carry new or higher penalties;
- auditor misconduct;
- new and emerging types of misconduct (eg using new technologies);
- significant market misconduct such as insider trading, market manipulation and continuous disclosure matters;
- misconduct that is serious in nature or extent of harm, or that involves a large market participant or entity; and
- misconduct by individuals, particularly criminal conduct or governance failures, at a board or executive level.
ASIC will also continue work towards its expanded role as primary conduct regulator for superannuation, with a focus on provision of inappropriate products, inappropriate disclosures or practices concerning fees, and trustees failing to act in the best interests of members.
ASIC has a further 16 projects underway which support this focus area, including cross-sector projects and projects focused on superannuation, insurance, financial reporting and audit, insolvency practitioners, and market infrastructure and supervision.
3 - Supporting strong and innovative development of the financial system
ASIC's focuses in this area are technology, law reform and cross-border financial activities.
In the case of technology, ASIC recognises that the COVID-19 pandemic has accelerated a shift to the digital economy. As a result, ASIC will both facilitate innovation that is beneficial to consumers, and mitigate the potential harms of technological harms (including exposure to security and operational failures and fraud). Perhaps as a sign of things to come, this month ASIC commenced action against RI Advice Group Pty Ltd, an AFS licence holder, for allegedly failing to have adequate cybersecurity systems in place.
ASIC will also focus on contributing to, and implementing, law reform and facilitating cross-border financial activities and capital flows, including through engagement with international regulators and bodies and supporting the negotiation and implementation of Free Trade Agreements and other bilateral and multilateral agreements. ASIC has announced a new cross-sector project in this area to analyse and plan the regulatory response to long-term pandemic scenarios, and another nine projects are ongoing.
4 - Helping Australians to be in control of their financial lives
ASIC will use education, research and regulatory tools to strengthen financial capability and literacy, and will focus on situations where consumer segments require additional outreach (eg rural, small business and indigenous customers).