Financial Services Regulation

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Unravelled: Full Federal Court rules against agreed civil penalties

4 June 2015

Written by Partners Matthew McLennan and Duncan Travis and Law Graduate Samantha Naylor Brown

Ecstasy, cocaine and industrial action at a construction site are unlikely subjects for an article on financial services regulation. They are, however, the things that have led to what could be a significant change to the way in which financial services regulators like ASIC and APRA can resolve civil penalty proceedings.

It is not uncommon in civil penalty proceedings for an agreement to be reached before judgment on an appropriate penalty. The practice has been for both the defendant and the regulator to approach the court with an agreed statement of facts and joint submissions on which they rely in asking the court to, in effect, approve the 'agreed penalty'. If this 'agreed penalty' fell within an appropriate range, the court would typically endorse the negotiated settlement and make corresponding orders.

As explained in a previous Allens Focus publication Civil Penalties: Are Negotiated Outcomes Still Negotiable?, this approach has not been uniformly accepted. Regulators have been criticised for negotiating lower penalties in exchange for cooperation. Similarly, courts have been criticised for 'rubber-stamping' penalties that inadequately punish offenders. Nevertheless, the practice has been longstanding and widespread.

The Full Federal Court has now handed down its decision in Director, Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union [2015] FCAFC 59, and concluded that the Federal Court cannot receive, or act on, an agreed penalty.

The case concerned industrial action taken by employees on several development project sites in May 2011. The relevant unions, the Construction, Forestry, Mining and Energy Union (CFMEU) and the Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia (CEPU), agreed that the industrial action was unlawful and agreed to pay penalties of $105,000 and $45,000 respectively to the regulator, the Director of the Fair Work Building Industry Inspectorate (the Director). The Full Federal Court, exercising its original jurisdiction, considered whether the court could take this agreement into account when fixing an appropriate penalty under the Building and Construction Industry Improvement Act 2005 (Cth).

The issue was a live one because of the High Court's decision in Barbaro v R [2014] HCA 2. This was the case that involved the ecstasy and cocaine. Barbaro concerned a prosecution submission on the range of available sentences in a criminal proceeding. The majority of the High Court held that the prosecution submission was a statement of opinion only, and should not have been submitted to the sentencing judge. More information on the Barbaro case can be found in the Focus article mentioned above.

Although Barbaro concerned criminal proceedings, in the CFMEU case the Full Court applied the decision on the basis that criminal sentencing and imposing a pecuniary penalty are similar in nature.1 Both tasks require 'instinctive synthesis' (that is, consideration of a complex range of interacting factors), address punishment by the state, and involve the public interest and public perceptions of the judicial process.2

Their Honours emphasised the court's ultimate responsibility to fix an appropriate penalty in a pecuniary proceeding, recognising that each party could make submissions to contribute to the process of 'instinctive synthesis'.3 The relevant question was whether the court could consider submissions relating to the penalty amount. Their Honours held that:

  • submissions expressing an opinion on penalty amount could not be considered because it would be difficult to assess the factors taken into account in forming that opinion;4
  • submissions expressing a range within which a penalty should fall could not be considered as this would limit the court's statutory discretion to determine the penalty;5 and
  • an agreement on a penalty is inadmissible, as it is merely a shared opinion. A shared opinion may simply reflect the amount that each party considers in its interest to agree to, and may not contemplate the range of factors relevant to determining an appropriate penalty.6

Notably, the court found that a respondent's admission of liability or willingness to submit to a substantial penalty may be relevant insofar as it demonstrates remorse or cooperation, but could not be considered in determining the actual penalty amount.7 The court also recognised that submissions by (or negotiations and agreements between) regulators and offenders on factual matters, the application of the law and relevant comparable cases, would be appropriate.8

It remains to be seen whether either party will seek special leave to appeal to the High Court. There may also be calls to change a range of legislation imposing civil penalties to allow the past practice to resume in the Federal Court (though a solution of that kind will throw up fresh constitutional questions about the power of Parliament to meddle in the judicial process).

For the time being, here are some thoughts on the effect of the decision in the CFMEU case. Firstly, although the case arose in an industrial relations context, we would expect the decision to be applied in financial services, including in the imposition of civil penalties under the Corporations Act 2001 (Cth). Secondly, we expect the decision to be followed by state courts. The outcome in the CFMEU case brings the Federal Court in line with the existing position in Victoria (as decided in ASIC v Ingleby [2013] VSCA 49). Given that it reflects the High Court's reasons in Barbaro, there is little reason for other state courts to take a different approach.

Thirdly, financial services regulators will not welcome the decision. The Commonwealth (which was granted leave to intervene in the proceedings) made submissions that 'Parliament expects civil regulators to play a central role in identifying and pursuing specific relief which they consider desirable and appropriate'. The court rejected those submissions, stating that Parliament has done 'nothing more than confer upon various courts, jurisdiction to impose pecuniary penalties, and authorise the [regulator] to apply for such imposition'.

Fourthly, the CFMEU case has the potential to have a significant impact on the dynamics of negotiating conclusions to (or 'settlements of') civil penalty proceedings. People settle cases because they want certainty of outcome. Regulators will no longer be able to give as much, if any, assurance about what penalty might be imposed if liability is admitted.

Finally, if civil penalty proceedings become harder to resolve:
  • regulators might be more inclined to seek less severe sanctions (such as accepting an enforceable undertaking);
  • defendants might be more willing to contest the proceedings to judgment; and
  • regulators might be more reluctant to commence proceedings with lower prospects of success. Without the option of an early exit through a negotiated outcome, decision-makers will need to be ready to go all the way.

Is there a clear winner in this state of affairs? As between regulators and defendants, probably not. Judges, in contrast, have secured an enhanced role in the enforcement of the law and through them, perhaps, the public interest has gained a louder voice.

  1. Director, Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union [2015] FCAFC 59 at [12], [239]-[240].
  2. Ibid at [3] and [239].
  3. Ibid at [164]-[165].
  4. Ibid at [239].
  5. Ibid at [240].
  6. Ibid at [241].
  7. Ibid at [3] and [241].
  8. Ibid at [237] and [242]

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