Unravelled: Increasing ASIC's enforcement powers
8 July 2014
Other articles in this edition of Unravelled:
- Unravelled: The Financial System Inquiry – matchmaking superannuation and infrastructure investment?
- Unravelled: Development of the corporate bond market
- Unravelled: ASIC's proposed competition objective
- Unravelled: Why CAMAC's final report might kickstart equity crowdfunding
By Partner Richard Harris and Senior Associate Alexandra Mason
In its submission to the Financial System Inquiry, the Australian Securities and Investment Commission has again raised the issue of the penalties that are available to it to punish and deter corporate wrongdoing. ASIC's submission recommends that a 'holistic review' be conducted into the availability and adequacy of penalties available under ASIC-administered legislation.
ASIC's submission relies heavily on data presented in its March 2014 report Penalties for corporate wrongdoing, which compares the range and flexibility of penalties that are available to other regulators with those available to ASIC.
In essence, ASIC submits that the range of penalties available to it are far less severe than those available to other regulators and that to better fulfil its role of both punishing and deterring corporate wrongdoing, it needs a broader range of more onerous financial deterrents.
ASIC's position has found a measure of support in the recent Senate Committee's review into ASIC's performance. The Committee's report released on 26 June 2014 is, for the most part, highly critical of ASIC's enforcement record but does include a recommendation that a review be conducted of the penalties currently available to ASIC.
Given the heightened community concerns about corporate wrongdoing since the GFC and the apparent disparity between ASIC's powers when compared to those of other regulators, it seems inevitable that the suggestion of strengthening penalties will appeal to many legislators. That said, ensuring appropriate checks and balances remain in the exercise of more serious and potentially company-destroying sanctions will be an important challenge for legislators.
In its submission to the Financial System Inquiry (FSI), ASIC states:
The toolkit of criminal, civil and administrative sanctions needs to adequately cover the typical range of corporate wrongdoing … Any gaps in this toolkit can present a barrier to taking an effective enforcement approach because appropriate remedies may not be available.
While the submission touches on criminal penalties1, ASIC's primary concern appears to be with the flexibility and effectiveness of the civil and administrative sanctions currently available to it.
Currently, the non-criminal penalties that are available to ASIC are either court-imposed civil penalties (following a prosecution by ASIC) or ASIC-imposed infringement notices (sometimes called 'speeding tickets').2 Civil penalties are not available for all misconduct: for example, they cannot be used in relation to misleading and deceptive conduct under section 1041E of the Corporations Act 2001 (Cth), or for failing to comply with obligations under a financial services licence (s912A). The maximum civil penalty for offences under the Corporations Act are $200,000 for individuals and $1 million for companies, with a maximum penalty under the ASIC Act of $1.7 million.
During the inquiry by the Senate Economics References Committee into its performance, ASIC submitted that it considers the penalties available to it to be inadequate. In particular, ASIC raised concerns that the quantum of the civil penalties are often less than the profit made by the wrongdoer as a result of the unlawful conduct. ASIC suggests that there remains an economic incentive to engage in misconduct. ASIC claimed that the inadequacy of the penalties available acts as a barrier to its ability to deter wrongdoers. ASIC's Chairman Greg Medcraft said: 'If the thinking of law-breakers is a tussle between fear versus greed, then we need penalties that amplify the fear and smother the greed.'
ASIC compared the penalties available to it to those in other jurisdictions, including Canada (Ontario), Hong Kong, the United Kingdom and the United States, in the key areas of corporate wrongdoing such as insider trading, market manipulation, continuous disclosure, misleading statements and defective provision of financial services. The report found that the maximum civil penalties available to comparable foreign regulators are generally more onerous than those available to ASIC. In the United Kingdom, for example, there is no cap on the quantum of the civil penalties that can be imposed on individuals and corporations. Civil penalties in the United States for corporations and individuals are typically calculated by reference to a multiple of the benefit which was unlawfully gained. Wrongdoers can be required to pay as much as three times the benefit. Administrative penalties, that is, penalties imposed directly by the regulator rather than a court, are also more widely available overseas, including powers of disgorgement of profits obtained by wrongdoers. ASIC's only administrative-type power is the power to issue infringement notices, capped at $100,000 per infringement.3
The ASIC submission to the FSI recommends that a 'holistic review' of penalties under ASIC-administered legislation be conducted and consideration should be given to the following issues:
- the availability and level of civil penalties, including the potential to use multiples of any benefit obtained through the wrongdoing, and converting the current maximums to penalty units (which can then be more easily indexed);
- the availability of administrative penalties;
- the availability of disgorgement of profits gained or losses avoided from corporate wrongdoing; and
- whether the infringement notice regime should be expanded to cover a broader range of contraventions.
Judge, jury and executioner
The push by ASIC for greater civil and administrative penalties is likely to have gained traction following wider perceptions of corporate wrongdoing and the public criticism of ASIC's enforcement record. The Senate report into ASIC's performance stated:
ASIC needs to be respected and feared. It needs to send a clear and unmistakeable message, backed-up and continually reinforced by its actions, that ASIC has the necessary enforcement tools and resources and is ready to use them to uphold accepted standards of conduct and the integrity of the markets.
Neither the ASIC FSI submission nor the recent Senate report put forward credible evidence to support the notion that there was a widespread concept of 'efficient breach' of corporate law in Australia: ie deliberate misconduct that gambled that the potential gain outweighed the potential penalty. It also could be argued that there is no evidence to suggest that corporate misconduct is either more widespread or more serious in Australia than in other jurisdictions.
An important issue when considering how ASIC's powers should be reformed will be the mechanics around the operation of additional, more stringent, penalties. Of particular concern will be whether additional powers are wielded by ASIC in an administrative capacity, or by the courts.
From the tone of the numerous public statements ASIC has now made about these issues, including to the FSI, it appears that it is advocating (perhaps unsurprisingly) that it be given further administrative powers that would enable it to act unilaterally to heavily punish perceived wrongdoing. In its submissions to the FSI, ASIC refers to the effectiveness of its power to issue infringement notices, including as a form of agreed settlement with wrongdoers, enabling it to avoid the need to compile sufficient evidence to meet civil standards of proof required by a court.
While an increased ability to issue infringement notices at high levels will doubtless increase the magnitude of revenue generated by the regulator, it is less clear that it will lead to fairer outcomes or greater corporate compliance.
The inherent tension associated with an arm of government having the ability to issue large fines without the check and balance of a court considering whether the breach of law has in fact been established, has long been a justifiable cause for concern.
The obvious risk of increasing ASIC's administrative penalty powers to enable it to, for example, issue large fines to those it considers to have engaged in misconduct, is that ASIC will operate as judge, jury and executioner (not to mention police and prosecutor). Where ASIC administers a penalty under an administrative power, the onus of proof will be reversed so that, rather than ASIC having to satisfy a court on the balance of probabilities that the misconduct has occurred, it will be for the impugned party to make an application appealing ASIC's decision on the basis of manifest unreasonableness: a difficult test to satisfy.
Unlike civil penalties administered by the court, there is no real transparency when penalties are administered by a regulatory body, nor does ASIC have any obligation to follow precedent in the manner of a court. This lack of transparency could become particularly problematic if, say, ASIC were given powers similar to those held by the UK's FCA. The FCA is entitled to impose a fine on wrongdoers for breaches of the Financial Services and Markets Act 2000 (UK) of any amount it considers appropriate. One can easily imagine a scenario where the quantum of the fine on a high-profile matter becomes the subject of media or community pressure such that the amount loses genuine connection with the seriousness of the wrongdoing. If a decision is made to give administrative fining powers to ASIC, a better approach may be to follow the US approach and link the penalty with the benefit received from the wrongdoing.
Despite the lack of evidence of any disparity between the degree of corporate misconduct in Australia compared with other jurisdictions, or that Australian corporations are essentially thumbing their noses at the corporate regulator, an increased penalty regime seems inevitable. However, careful consideration should be given to the manner in which any more serious penalty regimes be administered. Serious caution should be exercised when vesting greater unilateral powers in a regulator, and mechanisms should be introduced to ensure transparency and uniformity around the decisionmaking process.
In the face of a long run of cuts to ASIC's funding, it will be interesting to see whether, if a review of penalties is conducted, any consideration is given to the possibility of ASIC moving towards a more self-funding model by taking a portion of the penalties it imposes and whether the 'user-pays' mechanisms suggested by the Senate inquiry find favour. Of course, models such as that may only increase the internal tension for ASIC as both police and court.
- ASIC's submission indicates that the criminal sanctions currently available to it are, for the most part, in line with other jurisdictions.
- Constitutional restrictions limiting the exercise of judicial power means that ASIC cannot enforce infringement notices by requiring payment.
- ASIC suggests in its submission that the fact that it cannot enforce payment of an infringement notice means that it cannot be properly characterised as an administrative power.
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