25 October 2017

Will ASIC get to turn up the heat on penalties?

This article was written by Moira Saville, Amanda Beattie and Kara Butler.

On Monday the Government released a positions paper “ASIC Enforcement Review” (Paper) setting out proposals to strengthen penalties for misconduct in the corporate and financial sector.  The Paper comes off the back of the 2014 recommendation in the report of the Financial System Inquiry which indicated that the Australian Securities and Investments Commission (ASIC) needed “stronger regulatory tools”.  In response to that, the Government established the ASIC Enforcement Review Taskforce (Taskforce) which conducted a review and identified three key issues with the current regime:

  1. the penalties available for some types of offences are inadequate to address the range and severity of misconduct;
  2. some penalties are no longer a “credible deterrent”; and
  3. penalties are inconsistent in equivalent Commonwealth and State regimes.

What is proposed?

The Taskforce has identified 16 “positions” for public comment.  The positions include:

  • an increase in maximum terms of imprisonment for criminal offences under the Corporations Act 2001 (Corporations Act), Australian Securities and Investments Commission Act 2001 (ASIC Act) and National Consumer Credit Protection Act (2009) (Credit Act);
  • an increase in the maximum penalty for breaches of section 184 of the Corporations Act (criminal offences relating to directors’ and officers’ failure to act in good faith and use of position/information) to 10 years imprisonment;
  • removing imprisonment as a possible sanction for strict and absolute liability offences;
  • an increase in maximum civil penalty amounts for ASIC-administered legislation;
  • disgorgement of profits in civil penalty proceedings; and
  • the extension of civil penalty consequences to other conduct, including key provisions imposing obligations on licensees (such as financial services licensees and credit licensees) and insurers that contravene certain obligations under the Insurance Contracts Act 1984.

The Paper also seeks comment on other issues, without making specific proposals, including:

  • whether section 180 of the Corporations Act (directors’ and officers’ duty of care and diligence) should remain a civil penalty provision. This is in response to a concern that has been raised that mere negligence can give rise to a breach of that provision and the question is whether it is appropriate for that to rise to the level of a civil penalty; and
  • the proposal, by ASIC, to introduce a Financial Services Credit Panel, a peer review panel similar to the Market Disciplinary panel, which would take administration action against AFS and credit licencees. The Paper seeks comment on whether it would be appropriate for ASIC to delegate such functions to a peer review panel and, if so, what powers the panel should have.

Tougher criminal sanctions

One of the issues the Taskforce identified with current criminal sanctions is the fact that they have been inconsistently amended over time.  As a result there are significantly higher penalties for certain offences involving dishonesty than other comparably serious offences.  To address those issues, and others identified, the Paper proposes a comprehensive overhaul of sanctions, which includes some significant increases in penalties, including prison terms.  Below is a table summarising some of the main proposed increases in prison terms.

Offence

Current penalty

Proposed penalty

Corporations Act 2001

Section 184  – Good faith, use of position and use of information

5 years

10 years

Section 206A(1) – Disqualified person not to manage corporations

1 year

5 years

Section 344(2) – Financial records, reporting and auditors

5 years

10 years

Sections 601FD(4) and 601FE(4) –Duties of officers and employees of responsible entity

5 years

10 years

Part 5D.4 – Duties of officers and employees of licensed trustee companies (Sections 601UAA(1) and 601UAB(1))

5 years

10 years

Section 670A(3) – Misstatements in, or omissions from, takeover and compulsory acquisition and buy-out documents

1 year

5 years

Chapter 6D – Fundraising (Sections 708AA(10), 708A(9), 727(1) and 728(3))

6 months - 5 years

2 years - 10 years

Section 792D(1) – Licensing of financial markets (Assisting ASIC)

6 months

2 years

Section 892K – Compensation regimes for financial markets (Risk assessment report)

2 years

5 years

Part 7.6 – Licensing of providers of financial services (Sections 911A(1), 911B(1), 911C, 912C(3), 912D(1B), 912E(1) and 920C)

6 months - 2 years

2 years - 5 years

Part 7.7 – Financial services disclosure (Sections 952C(3), 952D(1), 952D(2), 952F(2), 952F(3), 952F(4), 952L(1) and 952L(2))

2 years - 5 years

5 years - 10 years

Part 7.9 – Financial product disclosure (Sections 1012DAA(10), 1012DA(9), 1017E(3), 1017E(4), 1017G(1), 1021C(3), 1021D(1), 1021D(2), 1021J(2) and 1021J(3))

6 months - 5 years

2 years - 10 years

Australian Securities and Investments Commission Act 2001

Part 3 – Offences relating to investigations and information gathering (Sections 64(1), 64(2), 65(2) and 66(1))

3 months - 2 years

1 year - 5 years

National Consumer Credit Protection Act 2009

Section 82(2) – Conduct contrary to banning orders 
Section 160D(2) – Prohibition on giving misleading information
Section 291(1) – False information

2 years

5 years


In respect of pecuniary penalties, it is proposed that a formula be adopted to determine the maximum pecuniary penalty.  For individuals, the proposed formula is 10 times the number of months of imprisonment.  For corporations, the proposed formula is 10 times the pecuniary penalty for individuals.  For example, the maximum penalty for a contravention of section 1309(1) of the Corporations Act (an offence for the provision of false information by an individual) is currently 200 penalty units ($42,000). Under the proposed regime, it would increase to 600 penalty units ($126,000), on the basis of the maximum term of imprisonment being five years.

It is proposed that the formula will not apply to:

  1. the most serious offences (generally those offences that carry a maximum term of imprisonment of 10 years);
  2. offences which do not attract an imprisonment option; and
  3. offences which are calculated based on the number of days in respect of which the offence is committed.

A change in approach to strict liability offences

One of the inconsistencies which the proposals in the Paper aim to address relates to the treatment of strict and absolute liability offences.  The majority of offences result in a fine being imposed, but there are some offences which impose a prison term.  That approach is inconsistent with the general rule applicable to strict liability offences, and in the Taskforce’s view should be rectified.  The proposal is that imprisonment should be removed as a possible sanction for all strict and absolute liability offences, but suggests that ASIC should have the ability to issue penalty notices (under section 1313 of the Corporations Act) in relation to all such offences, which is not currently the case.  

There is also a proposal that ordinary offences be introduced to mirror some strict liability offences, but requiring the element of fraud, with imprisonment to be the penalty for those offences.  This is intended to address situations where strict liability offences (if fraud is involved) are serious enough to warrant imprisonment as a penalty.  The kinds of offences that this would relate to are obligations to notify the market operator of certain types of information and certain financial reporting and audit obligations, for example, offences under sections 205G, 286, 307A and 989CA of the Corporations Act.

Bringing civil penalty sanctions into the 21st century

A major criticism of the civil penalties currently imposed under the Corporations Act is that the maximum penalties have not been increased since 1993.  The Paper indicates that the current maximum penalty of $200,000 for individuals is more than $150,000 below what is should be, on the basis of inflation alone.  The Paper suggests that individuals stand to gain much more than the penalty that would be imposed, and as a result, it is not an effective deterrent.  There is also disparity between the penalties in the Corporations Act and other comparable conduct in the ASIC Act, Credit Act and Competition and Consumer Act 2010.

To address these issues, the Taskforce has proposed that maximum penalties should be increased for all ASIC administered legislation. The proposal is that penalties be expressed in penalty units, rather than monetary amounts (which is currently the case) and increasing the amounts to reflective the seriousness of the offences.  Below is a table comparing the current civil penalties for individuals and corporations with the proposed changes.

Current maximum penalty

Proposed changes

Individuals 

ASIC Act: 2,000 penalty units ($420,000)

2,500 penalty units ($525,000)

Credit Act: 2,000 penalty units ($420,000)

2,500 penalty units ($525,000)

Corporations Act: $200,000

2,500 penalty units ($525,000)

Corporations

ASIC Act: 10,000 penalty units ($2.1m)

The greater of 50,000 penalty units (currently $10.5m) or 3 times the value of the benefits obtained or losses avoided or 10% of the annual turnover in the 12 months preceding the contravention

Credit Act: 10,000 penalty units ($2.1m)

The greater of 12,500 penalty units (currently $2.625m) or 3 times the value of the benefits obtained or losses avoided or 10% of the annual turnover in the 12 months preceding the contravention

Corporations Act: $1m

The greater of 12,500 penalty units (currently $2.625m) or 3 times the value of the benefits obtained or losses avoided or 10% of the annual turnover in the 12 months preceding the contravention


ASIC has independently proposed that the maximum penalty for an individual should be increased to $1m, or 3 times the value obtained, or losses avoided.  The Taskforce has not adopted that proposal in the Paper, but seeks comment on it.  The Taskforce proposes that disgorgement remedies be available in civil proceedings commenced by ASIC under the Corporations Act, Credit Act and ASIC Act, which would allow ASIC to seek the repayment of an amount that represents the profits gained or losses avoid by the misconduct.

New civil penalty provisions

While the Taskforce is firmly of the view that civil penalties should be not available for offences involving dishonesty (as they are criminal in nature and should be treated as such) it did form the view that the regime should be extended to other provisions for the following reasons:

  1. to enable sanctions which act as a deterrent and promote compliance where conduct is serious but not truly criminal (as with dishonestly offences);
  2. to provide an alternative remedy that may be a more appropriate or proportionate response to the misconduct; and
  3. to ensure consistency with obligations in other legislation.

In light of that, the Taskforce proposes that civil penalty consequences be applied to the following provisions:

Section

Description

Corporations - failure to provide and defective disclosure and takeover documents

670A

Misstatements in, or omissions from, takeover and compulsory acquisition and buy-out documents

727

Offering securities without a current disclosure document 

728

Misstatement in, or omission from, disclosure document

Financial services - disclosure

1012A

Obligation to give a PDS - personal advice recommending particular financial product

1012B

Obligation to give a PDS - situations related to issue of financial products

1012C

Obligation to give a PDS - offers related to sale of financial products

Financial services and markets - unlicensed conduct

911A

Need for a financial services licence

791A

Need for a licence (financial market)

820A

Need for a licence (CS facility)

905A

Need for a licence (derivative trade repository)

Financial services - failure to comply with client money obligations

981B

Obligation to pay client money into an account as required

981C

Requirements relating to dealing with client money account

Financial services and markets - failure to notify ASIC of breaches of obligations

912D

Failure to notify ASIC of breach of obligations

792B

Failure to notify ASIC of breach of obligations

821B

Failure to notify ASIC of breach of obligations


There is also a proposal that provisions imposing general obligations on licensees, including AFS licensees (under section 912A of the Corporations Act), should be civil penalty provisions.[1]  That would be a significant departure from the current position as contravention of these provisions is not currently an offence, but rather an administrative matter which may result in the suspension or cancellation of a licence.  The Taskforce accepts that it may not be appropriate for all such provisions, but raises it as a question for consideration.

Possible civil penalties for insurers

ASIC administers the Insurance Contracts Act 1984 (ICA), but the manner in which it does so is complicated.  In 2013, section 14A of the ICA was inserted to enable ASIC to exercise administrative powers in respect of a failure of an insurer to comply with the duty of utmost good faith in handling the settlement of a claim, as if it is a failure to comply with a financial services law.  That was necessary because the definition of “financial services” in the Corporations Act specifically excludes the handling of an insurance claim, which limited ASIC enforcement powers in respect of insurance contracts.  However, section 15 of the ICA continues to curtail ASIC’s enforcement ability as it provides that an insurance contract cannot be the subject of relief under any other legislation.  A practical implication of that is that ASIC cannot take action in relation to insurance contracts under section 12CB of the ASIC Act, which deals with unconscionable conduct in connection with a financial service.

The Paper proposes to address these issues by extending civil penalty consequences to a breach of section 13 of the ICA, which imposes the requirement on the insurer (and policy holder) to act with the utmost good faith in respect of any matter arising under or in relation to the insurance contract.  The Taskforce formed the view that this would allow ASIC to use the provision as an enforcement tool where administrative or representative action is not appropriate, but action is still needed to redress conduct by the insurer.  This is again intended to act as a deterrent and encourage compliance with the duty of utmost good faith.

What next?

Anyone wishing to respond to the Paper has just under four weeks to do so with submissions due on 17 November 2017


[1] It would also extend to market licensees under section 792A of the Corporations Act, CS facility licensees under section 821A of the Corporations Act, licenced derivative and trade repositories under section 904A of the Corporations Act and credit licensees under section 47 of the Credit Act

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