ASIC – No more Mr Nice Guy

Here’s what you can expect of ASIC after the Royal Commission and what you’ll need to do.

In the wake of the Royal Commission and the criticisms of ASIC being a soft regulator, ASIC Commissioner James Shipton has unequivocally said that ASIC will adopt a much tougher and more aggressive stance in its monitoring and enforcement of compliance with the financial services laws.

What to expect:

1. Speed.

In response to one of the major criticisms levelled against it by Commissioner Hayne, it is likely that a better resourced ASIC will deal with complaints, enquiries and investigations much more quickly.

This will mean that ASIC may give very short timeframes for responses from licensees to the many statutory powers to require production of documents or written responses to enquiries.  In the past, ASIC has generally been open to requests for extensions of time for the purpose of gathering, collating and supplying information required.

Previously, some licensees may have been slow to react to ASIC notices, for a range of reasons including paralysis as a result of initial shock and horror, internal bureaucratic inertia, misplaced confidence in their position or ignorance of the effects of non-compliance with the notices.  This may have resulted in a failure to meet ASIC’s deadline.  It may also have meant that they were slow to seek specialist advice about how to deal with the notices and the potential that the on-going scenario held for them.  A generous extension of time generally allowed them to get back up to speed and to obtain advice about where ASIC’s investigations might lead.

2. Surprise.

Henceforth, ASIC surveillance and evidence gathering may well be conducted covertly without any warning to licensees.  Up to now there have often been obvious warning signs or even clear indications made by ASIC that it was conducting surveillance or making investigations of either particular licensees or of specific sectors of the industry.  That may be much less obvious in the future with ASIC only showing its investigatory hand once it has exhausted its evidence gathering resources from third party sources.

Although it has used its powers to make unannounced raids and the seizing of documents on many occasions in the past, the frequency may be expected to increase.  Similarly, the use of its powers to freeze assets and suspend licences could foreseeably be more prevalent.  It may be that ASIC will give licensees less opportunity to “get things back on track”.

3. Enforcement.

The Interim Report of the Royal Commissioner identified that ASIC had not taken any regulatory action for late breach reporting.  This is a statistic which ASIC will undoubtedly be keen to change.  Accordingly, timely breach reporting will be essential.  It is now only a matter of time before ASIC gains a scalp for late breach reporting.

Expect from now on that all compliance obligations will be very closely scrutinised.  There is not likely to be much sympathy or latitude given for “inadvertent” or administrative failures.

4. Less negotiation/more prosecution.

Commissioner Hayne pointed to the fact that ASIC has engaged largely in the process of obtaining Enforceable Undertakings from licensees which it considered recalcitrant even where, on its face, the conduct which had been uncovered suggested that prosecution could have been more appropriate.

The Report highlighted that, although published on the ASIC website, the licensees providing the EUs were required to do no more than acknowledge that ASIC’s “concerns” were “reasonably held”.  It was emphasised that the EU process has, until now, largely been one where the essential terms of each EU are negotiated between the licensee and ASIC.  The prospect of negotiating the EU terms is likely to be extensively curtailed.  Even in its most recent EUs (before the publication of the Interim Report) ASIC has shifted its language, now referring to EUs as being “court enforceable”.

In the light of the observations of the Commissioner it seems reasonable to expect that from now on, ASIC will be much less likely to contemplate EUs and more keen to proceed to prosecutions.  One ancillary reason for this inevitable shift away from EUs is that prosecutions are conducted by the Commonwealth Director of Public Prosecutions and once a matter is in the hands of the CDPP, an ASIC officer becomes an informant but the prosecution is then conducted out of the budget of the CDPP rather than ASIC’s own budget.

One can also imagine that, following the outrage in the media and by members of the public, there is likely to be increased “sympathy” from Courts to ASIC prosecutions.  That is not to say that the Courts will be biased against licensee defendants but there is a likelihood that the Courts may adopt a stance which favours ASIC unless there is clear reason to find that ASIC’s evidence or motive is wanting.

5. Publicity and deterrence.

ASIC has published its “scalps” on its website for a long time.  It is reasonable to expect that this will continue and will also escalate in relation to both deterrent and educative objectives.  ASIC is also likely to go to greater lengths to broadcast its prosecutions and any Court-imposed sanctions upon licensees in order to improve its own public image and to try to change the public perception that it is a toothless tiger.

6. Sanctions against individual officers, employees and companies.

Whilst ASIC has frequently demonstrated that it has been prepared to chase down small licensees and their officers, large licensees have enjoyed a relatively privileged and protected status until now.  In considering its actions against large licensees ASIC has, on occasion, clearly had regard to national interests including economic and employment fallout as a priority over breaches of financial services laws and its regulatory obligations.  Some take the view that, as a consequence, the large banks have considered that they are untouchable and their attitude to ASIC has become cavalier and arrogant.  Where large licensees have crashed and burned, it has often been where here has been serious fraud or other wrongdoing by controlling officers.  In such cases, criminal prosecutions have been inevitable.

It has been proposed that one method of dealing with bad behaviour by banks and other large licensees is to make officers and managers who have control or are in positions where they could prevent or influence wrongdoing by the institution, liable for prosecution.

It is certainly conceivable that, henceforth, ASIC will place less focus on its powers of administrative penalty and place greater emphasis upon those who are in a position to ensure that breaches of financial services laws do not occur.

What to do:

1. Keep your eyes and ears open.  Look out for the warning signs.  If you suspect that ASIC is conducting surveillance and/or is investigating, act don’t wait.  Consider what might be being examined.  Know what areas or industry deficiencies ASIC has announced that it will concentrate on and ensure that you are on top of these.

2. Act quickly if you do receive contact from ASIC or any formal notice or letter.  Get professional advice immediately if you do not understand what ASIC requires or you are not sure where the process is leading.  Do not put the correspondence into the “too hard basket”.  It definitely will not go away!  Certainly, do not rely on seeking an extension of time to respond or deal with the issues.

3. Make sure that you are on top of all of your compliance requirements.  Particularly, be alert to breach reporting.  This means not simply making a breach report when required, but making the breach report within the required timeframe.  The days until the first prosecution for failing to make a breach report on time are most certainly numbered.

4. Do not expect to be able to negotiate the terms of an EU or to be able to engage in dialogue with ASIC as to any penalty or sanction which it is contemplating.

5. Make sure that if you personally are in a position to prevent or control any bad behaviour by the licensee, you do so and you document what you have done so that you can clearly substantiate it if there is ever any investigation into your role.

6. If you have any concerns about the licensee’s activities or you are unsure about them, do not sit tight.  Raise them early before any on-going actions become entrenched.  If nothing occurs to remedy the situation, document your efforts and seek external expert advice.

7. Should you begin to feel the hot breath of the regulator on the back of your neck, you might find some relief by calling your lawyer who can provide you with knowledge, expertise and a clear road map of the path which should be followed.

Got more questions?

Author: Tim Dixon (Special Counsel)