Key areas of focus for the year ahead 9 min read
On 21 November, at the ASIC Annual Forum 2023, ASIC Deputy Chair Sarah Court announced ASIC's enforcement priorities for 2024. The Deputy Chair also addressed ASIC's regulatory enforcement approach generally, by reference to recent criticisms levelled at the regulator.
Areas of focus include:
- compliance with design and distribution obligations (DDO) and combatting greenwashing
- the superannuation and insurance industries, with enforcement resources to be directed towards addressing:
- superannuation member services failures and misconduct resulting in the systematic erosion of superannuation balances
- insurer claims handling failures
- given the current economic climate and rising cost of living, enforcement action aimed at protecting vulnerable consumers.
Before announcing ASIC's 2024 enforcement priorities, the Deputy Chair addressed what she described as the 'considerable public scrutiny and comment' that has recently been directed at ASIC's approach to enforcement. In particular, suggestions that ASIC has not changed its enforcement approach since the days before the Financial Services Royal Commission (when the highly publicised 'why not litigate' approach was announced).
The Deputy Chair identified significant actions brought by ASIC recently, and said its enforcement approach is 'fundamentally different' to the pre-Financial Services Royal Commission days. In particular, the days when ASIC negotiated outcomes, when it accepted undertakings and when penalties were 'relatively low'.
In contrast, the Deputy Chair said ASIC's approach now is 'proactive, strategic and bold'—including in the way it sets its strategic priorities each year and directs its limited resources to pursuing them, particularly against what she referred to as the 'big end of town' and even where that involves testing the law.
Compliance with DDO remains an enforcement priority, as it was last year. Following the introduction of new DDO laws in late 2021, ASIC has issued over 80 stop orders to prevent the distribution of products it considered to be unfit for both consumers and investors, or those that were distributed outside of their target markets.
ASIC has also commenced four civil penalty proceedings alleging breaches of DDO. These have been against an issuer of a credit product, a financial product distributor, an online investment platform and a provider of a crypto exchange.
ASIC has flagged that, to date, it has primarily focused on product design and target market determinations. In this next phase of compliance work it will focus on distribution, and specifically on the reasonable steps taken by issuers to ensure the products are appropriate for their target markets.
Sustainable finance and greenwashing also remain an enforcement priority for ASIC. The Deputy Commissioner said ASIC has been described as 'world-leading' in this enforcement area, having issued guidance, conducted extensive surveillance and instituted proceedings in the Federal Court against superannuation and investments companies. Karen Chester, ASIC Deputy Chair, also spoke about the intersection between greenwashing, incoming mandatory climate reporting and the Government-backed Australian sustainable finance taxonomy. The Deputy Chair described these initiatives as the 'antidote' to greenwashing. Nevertheless, the Deputy Chair made clear that ASIC sees its role as extending to taking greenwashing enforcement action where necessary.
To this end, ASIC has flagged that, going forward, its enforcement focus will be on:
- net-zero statements and targets made without a reasonable basis
- use of terminology without a reasonable basis, such as clean, green, or carbon neutral
- vague terms or inaccurate labelling in sustainability-related funds.
This indicates that we can expect a broader focus in comparison with ASIC's greenwashing enforcement history to date, which has primarily focused on alleged misrepresentations as to the scope and nature of investment screens (ie the practice of selecting investments based on ESG-related criteria).
Against the context of sustained cost of living pressure, the protection of vulnerable consumers has also remained a priority since last year. ASIC's specific focus this year will be on predatory lending and high-cost credit, misconduct relating to used car financing to vulnerable consumers (including by brokers, car dealers and finance companies) and compliance with financial hardship obligations.
This focus area was the subject of ASIC's recent successes in the Federal and High Courts in enforcement proceedings against credit providers Cigno, BHF Solutions and BSF Solutions.
Many of ASIC's enforcement priorities are directed to consumer and retail markets. Nevertheless, the Deputy Chair said ASIC will maintain its focus on the markets themselves and misconduct damaging market integrity. That includes a focus on insider trading, continuous disclosure breaches and market manipulation as enduring priorities.
In his opening statement to the Senate Inquiry into ASIC investigation and enforcement on 23 June 2023, ASIC Chair Joe Longo defended ASIC's enforcement record against insider trading, referring to the 33 investigations, 22 charges and six criminal convictions it has achieved in the past three years.
ASIC has also introduced a new 2024 enforcement priority of technological and operational resilience for market operators and participants, in line with the new Market Integrity Rules.
Off the back of its relatively recent expanded civil penalty role in superannuation, ASIC will retain misconduct in the superannuation sector as an enforcement priority for 2024.
Recent ASIC enforcement action in this area has included a number of proceedings against superannuation funds alleging inadequate policies and procedures, as well as failures to comply with the fund's own internal dispute resolution requirements. For the next 12 months, ASIC will focus on member services failures and misconduct resulting in the systematic erosion of superannuation balances.
This enforcement priority aligns with ASIC's adoption of retirement outcomes as one of its four key strategic priorities in its 2023-2024 Corporate Plan, in which ASIC acknowledged the superannuation sector's importance, given Australia's ageing population.
Insurance will also remain an enforcement priority for 2024. As we reported in our Insurance Regulatory Risk Report, during 2023, ASIC maintained an active enforcement agenda against insurers, including by commencing four civil penalty proceedings against insurers, alleging false and misleading conduct, breaches of AFS licensee obligations and breaches of the expanded unfair contract terms regime.
In 2024, following a proliferation of insurance claims arising from natural disasters, ASIC's enforcement priority for insurers is claims handling. This represents a shift from ASIC's 2023 enforcement focus on failures by providers of general insurance. At the ASIC Annual Forum, the Deputy Chair also indicated ASIC would focus on poor communication and record keeping and the inappropriate use of exclusions by insurers.
Acknowledging the current economic climate and that approximately 96% of ASIC-registered companies are small businesses, ASIC has included protecting small businesses as a new enforcement priority in 2024.
In this area, ASIC's enforcement focus will be on:
- misconduct by financial services providers and credit providers in their dealings with small business, such as unfair contract terms, unlawful credit activity and insurance claims handling
- misconduct related to company failures, in the context of failed companies often owing extensive liabilities to small businesses. ASIC stated it will continue to disqualify directors involved in consistent failures and prosecute them for breaches of their duties, concealing assets and failures to assist liquidators.
Gatekeepers such as auditors, credit and financial services licensees and registered liquidators have also been called out in ASIC's 2024 enforcement priorities given their 'critical role to play in preventing corporate misconduct'. The Deputy Chair described these gatekeepers as being in a 'unique position to identify and limit misconduct in the entities they advise'. As such, ASIC will focus on instances where gatekeepers do not meet the requisite standards.
While ASIC's specific enforcement priorities change from year to year to reflect the shifting regulatory landscape, it maintains enduring priorities. Currently they include:
- misconduct that damages market integrity
- misconduct impacting First Nations people
- misconduct involving a high risk of consumer harm
- systemic compliance failures by large financial institutions
- new or emerging conduct risk within the financial system
- governance and directors' duty failure.
ASIC has only added one new enduring enforcement priority since 2023, Governance and directors' duties failures. This is consistent with the general shift in the regulatory landscape over recent years to focus on governance, systems, controls and executive accountability (eg the introduction of the Financial Accountability Regime and, before that, the BEAR).
While many of the enforcement priorities remain the same or have slightly shifted focus, there are a small number from 2023 that ASIC has removed from its headline enforcement priorities. These are:
- misconduct involving high-risk products, including crypto assets
- combating and disrupting investment scams
- misleading and deceptive conduct relating to investment products
- misconduct that involves misinformation through social media
- manipulation in the energy and commodities derivatives markets.
While these issues were not specifically identified as enforcement priorities, we know that a number of these areas remain a strategic priority for ASIC. In ASIC's Corporate Plan for 2023-27, ASIC confirmed it will focus on six core strategic projects, including with respect to:
- scams, which involves working with other agencies to coordinate disruption strategies and taking targeted enforcement action;
- crypto-assets, supporting the development of an effective regulatory framework and raising public awareness of the risks inherent in crypto-assets and decentralised finance; and
- DDO, with a focus on targeted risk based surveillance.
In addition, many of these issues fall within other areas that were identified as enforcement focuses for ASIC (eg, misconduct that damages market integrity or has a high risk of consumer harm, and protection of vulnerable consumers).
ASIC has made it clear that it will use its 2024 enforcement priorities to hold itself accountable as a regulator that does what it says it will do.
For businesses operating in the areas of focus, these priorities are a forewarning to review applicable policies, systems and controls regularly, in order to minimise the risk of being the target of regulatory attention.