regulator

Regulatory Engagement


"In the area of regulatory enforcement, much can be done without new legislation. As the Commissioner noted, most of the issues identified with the industry are adequately addressed by existing laws.


2019 is likely to be another very busy year for financial services investigations and litigation. We expect not only to see actions from regulators, but a continued stream of post-commission class actions against a wide range of financial institutions.


Although the regulators have pledged to improve their enforcement approach, all eyes will be on them to see if they follow through. We predict that if there haven’t been noticeable changes within 12-18 months, there will be increasing voices calling for more radical change."


 

Relevance & consequences for industry

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The final report had a great deal to say about the regulators of the financial services industry – ASIC, APRA and the ACCC – with 14 recommendations expressly directed at them. 

But it is important to realise that those recommendations will have profound implications for the regulated, who should ensure that they are ready for what is to come.   

Failures of enforcement

The Commissioner has given the regulators, particularly ASIC, a clear message: improve or be replaced.  It is abundantly evident that the Commissioner gave serious consideration to the establishment of a specialist civil enforcement agency, drastically curtailing ASIC’s remit.  Though not among the recommendations in the final report, the Commissioner clearly signals that it may be necessary in the future.

A number of circumstances were also identified where misconduct had been observed in APRA-regulated institutions. The Commissioner questioned APRA’s apparent lack of enforcement action against those institutions, though the final report did identify a tension between:

  • APRA’s core mandate as a prudential regulator; and
  • increasing community expectations that it should also be a conduct regulator and undertake enforcement actions for the purposes of consumer protection.

Twin Peaks retained, but other changes to come

Despite speculation to the contrary before the final report was released, the Commissioner has recommended the retention of the “Twin Peaks” model, with ASIC as the primary conduct and disclosure regulator, while APRA is charged with prudential responsibility.

The final report notes potential advantages in removing parts of ASIC’s remit, such as financial services consumer protection, and transferring them to the ACCC.  The Commissioner has concluded, however, that such a change would “disrupt the processes of responding to what has happened in the Australian financial services industry”.  He concludes that the costs of associated disruption would outweigh the possible benefit.

The final report has attempted to address existing issues in relation to the supervision of the superannuation system and of the BEAR.

In relation to superannuation, the Commissioner recommended that the roles of APRA and ASIC be adjusted so that:

  • APRA retains its current functions of ensuring that the financial promises made by superannuation entities that APRA supervises are met within a stable, efficient and competitive financial system; and
  • ASIC’s remit is broadened so that it has the power to enforce all the provisions in the Superannuation Industry (Supervision) Act (currently limited to matters of disclosure).

In relation to the BEAR, which is currently solely regulated by APRA, the Commissioner recommended that ASIC and APRA be joint administrators. ASIC is to be charged with overseeing those parts of the BEAR that concern consumer protection and market conduct matters while APRA will oversee the prudential aspects. Over time the BEAR should be extended to all APRA-regulated financial services institutions, and APRA and ASIC should jointly administer those provisions.

These recommendations clearly allocate responsibilities for enforcement between the regulators in order to address apparent failures in enforcement against the types of misconduct that was revealed in the Commission. The recommended broadening of ASIC’s remit in relation to the superannuation system and the BEAR will likely see increased enforcement action given ASIC’s new “why not litigate” enforcement approach.

Watching the watchdogs

Following the Commission, there will also be further regulation of the regulators, including “capability reviews” and a new independently-chaired oversight body.

 

What you should do next

Court filings to follow

Expect ASIC to fully embrace its new “why not litigate?” approach.  There will be more civil actions, and more referrals to prosecutors. 

The final report flags more than 20 civil, and 3 criminal, referrals to the regulators.  Even before the final report, ASIC had launched a number of new cases against big-name players.

We predict that ASIC will become less willing to consider negotiated outcomes that are limited to enforceable undertakings, infringement notices or voluntary donations.

Comply with your Codes

The final report recommended a greater role for enforceable Codes of Conduct.  Consider whether you need to review your current practices and processes for compliance with the Codes that apply to you.

Expanded pecuniary penalties

Proposed legislation amends the Corporations Act and the ASIC Act to introduce a stronger penalty framework for misconduct. Several provisions will have associated civil penalties for the first time (s 912A, misleading or deceptive conduct) and civil penalties are also increasing.

Expect to be watched

Given the considerable pressure on regulators to be more proactive and effective, expect to be watched.  We are already aware of many organisations facing new and substantial investigations from regulators.

The Government has proposed a new proactive power for ASIC to issue a “product intervention order” if satisfied that a product is likely to result in “significant detriment” to retail clients or consumers.

Authored by: Alex Morris, Amanda Engels, Alison Hammond and Jo Ruitenberg.

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If you need further guidance on the outcomes of the Royal Commission, our team of experts are here to help.

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In-depth Analysis

Here our experts share deeper guidance on the recommendations outlined in the report and what you should be considering now.

Key Recommendations

Here our experts have put together key observations and recommendations for law reform.

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