Much has been written on the implications of the Royal Commission’s Final Report for the financial services sector, and in particular for banks, insurers and the superannuation industry. Those implications will have a considerable flow on impact for the economy, access to credit and for advisors within the financial services sector.
But recent public statements from ASIC make it clear that there are implications for all companies, their boards and their executives. So what does the report mean for business at large?
Has ASIC been too soft?
ASIC and its predecessors were reluctant to prosecute well resourced companies for apparent breaches of legislation. Its limited funds were used for straight forward matters with immediate returns. It was often criticised for not pursuing recalcitrant directors, especially in phoenix or insolvency situations. When it did venture to court for a high profile prosecution it was not infrequently embarrassed by the outcome.
This lead it and fellow regulators to seek alternate policing methods which did have a positive monetary effect and achieved a level of discipline within industry. However this also was seen to contribute to the very behaviour that was the subject of the Commission.
Commissioner Hayne was critical of the regulators, particularly at ASIC, issuing infringement notices, negotiating settlements and requiring enforceable undertakings for apprehended wrongdoing and breaches of the corporate and competition framework. Although this was reflective of a common overseas practice and lead to much needed income for the otherwise resource strapped regulators, Hayne considered that “negotiation cannot be the starting point for an effective regulator”.
In the opinion of the commission, this reflected an “ineffective enforcement culture”. A recommendation was made for the establishment of a special enforcement unit, and that has quickly been acted on.
Establishment of Special Enforcement Unit
Mr Shipton, Chairman of ASIC has said that “what the Royal Commission has clearly done is give us encouragement and a very strong steer that we should never be reticent or reluctant about using enforcement”. ASIC will now weigh the use of negotiated settlements against the benefits of a court based outcome. It is now less likely to negotiate and “will use directors’ duties to hold individuals accountable”.
David Crennan, Deputy Chair of ASIC, has been appointed to head the new enforcement unit. Its published principles are predicated on “deterrence, public denunciation and punishment of wrongdoing by way of litigation once ASIC is satisfied that breaches of the law are more likely than not, it will ask itself why not litigate?”
Additional powers sought
Mr Crennan has lobbied for the creation of a Federal Criminal Court and has this week obtained special disgorgement powers which would enable ASIC to confiscate profits obtained in the course of law breaking. This resembles the power oft exercised by the US Department of Justice to devastating effect. Although that wide ranging power has not yet been granted, it is understood that the Federal Attorney General’ department is exploring whether corporate trials should be elevated to the Federal arena and what other remedies might be made available.
This will have broader implications for business
Although 13 direct referrals were made to ASIC to consider prosecution, it is investigating many more. Its investigations are not limited to companies in the financial services industry but extend into, potentially, all areas of corporate wrong doing.
Although it is unclear to what extent ASIC will litigate, it is clear it will be very much more active as the corporate policeman. Already the government has allocated a further $41.6m in funds for prosecutions over 8 years but with the expectation that criminal and civil penalties will inflate the war chest over time.
The amounts being publicly debated in the press and by our politicians are potentially staggering and would have significant ramifications for anyone involved.
And… in an election year where most politicians are saying they will “be tough on big banks/business” be prepared for more headline developments in this space.
