This article was written by Hannah Phua and Alex Morris.
The Australian Treasury has released proposed legislation to give effect to the Government’s response to the Financial Services Royal Commission recommendations. KWM previously issued an alert which provides an overview of the key proposals and the initial takeaways.
This alert explores the proposal to confer ASIC with powers to give directions to AFS licensees and credit licensees to prevent or address suspected breaches of financial services law or credit legislation.
- The proposal strengthens ASIC’s enforcement powers and allows it to issue a direction to regulate conduct in response to mere suspicion of contravention of financial services law before (or as an alternative to) exercising its general investigation powers.
- Licensees can make submissions before a direction is issued, unless ASIC considers that a delay would be prejudicial to the public interest.
- It may be difficult to challenge ASIC’s direction and a failure to comply can lead to further civil penalties.
ASIC’s existing powers to regulate financial services and credit businesses
Under the current legal framework, ASIC has existing powers to regulate a financial services licensee or credit licensee’s ongoing systems and conduct after the relevant licence has been granted. This includes powers to:
- vary, suspend or cancel the licence if ASIC can establish the licensee has contravened the law and the contravention justifies the action;
- apply to the court for an injunction; and
- negotiate an enforceable undertaking with the licensee.
As proposed, the new powers do not modify or limit these existing licensing powers and can be exercised in any instance of a suspected contravention. There is no requirement that ASIC’s direction powers be used in preference to ASIC’s existing regulation measures only as a “last resort”.
New direction powers expansive and far reaching
If the Bill is passed in its current form, ASIC will be empowered to issue a direction to an AFS licensee to engage in specific conduct if it has reason to suspect that the licensee has engaged, is engaging, or will engage in conduct constituting a contravention of a financial services law. Mirror direction powers will also be available to ASIC in relation to suspected contraventions of credit legislation for credit licensees.
The new law is proposed to commence the day after the amending Act receives Royal Assent. ASIC can make directions after that date if it has a “reason to suspect” that past, ongoing and anticipated future conduct amounts to a contravention (even if that suspicion was formed before the commencement date). This “reason to suspect” threshold is almost identical to that which triggers ASIC’s investigation powers under s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) and s 247 of the National Consumer Credit Protection Act 2009 (Cth) (Credit Act). In practical terms, ASIC can now issue directions to licensees before forming its own concluded view as to whether there is or will be a contravention. The threshold of suspicion is an amorphous concept – the courts have considered this “involves something more than mere speculation”, but does not need to be as high as a belief based on reasonable grounds. It would be a difficult task to challenge a decision by ASIC on the ground that ASIC did not have the requisite suspicion because the challenger bears the onus of proof.
As a preliminary observation, ASIC is not restricted in its discretion to issue a direction based on the gravity of the contravening conduct (or anticipated contravening conduct). The proposal potentially confers board powers on ASIC even in instances of minor or technical contraventions of general licence obligations under s 912A of the Corporations Act 2001 (Cth) (Corporations Act) or s 47 of the Credit Act.
Further, the scope and substance of ASIC’s direction is not presently limited by Treasury’s proposal, but the conduct specified in the direction must be targeted at addressing or preventing the suspected contravention that triggered the direction, or preventing a similar or related contravention. Examples of permissible directions to the licensee include:
- not to authorise persons as authorised representatives
- not to accept new clients
- not to transfer a specific asset to another person
- to conduct a review or audit the activities or records of an authorised representative
- to appoint, engage or deploy persons to carry out specific tasks
- to assess the extent of the contravention, identify impacted persons, and establish and implement a remediation program
- as an ancillary step, to conduct a review of its records or systems prior to putting a compliance process in place
The Explanatory Memoranda to the Bill indicate that ASIC’s powers, however, is not without boundaries. In the context of a direction to implement a compensation program, while ASIC can set out features of the desired program at a broad or detailed level, ASIC cannot traverse powers reserved for a court such as directing a licensee to make payment to compensate a client or class/group of clients.
Separate difficulties could arise if ASIC exercises its direction powers before commencing an investigation into the suspected breaches of the law, for instance, by requiring the licensee to undertake a review to determine the extent of the alleged misconduct and to report to ASIC the outcomes of the review. This may potentially compel disclosure of materials which would, in the ordinary course, likely be the subject of legal professional privilege.
ASIC can direct the licensee to engage in conduct for a specified period, by a specified time or until a particular condition is met. This leaves open the possibility for a direction to apply indefinitely until ASIC is satisfied that the suspected contravention is properly addressed or there is no longer a risk of contravention.
Procedure before exercise of direction powers
The introduction of the direction powers is intended to enable ASIC to take enforcement action to regulate improper conduct in a timely and resource-efficient manner. These new powers, however, come with little procedural safeguards for licensees.
Before a direction can be validly issued, the licensee must be afforded the opportunity to appear at a hearing before ASIC and make submissions to ASIC on the matter. This procedural step can be circumvented if ASIC considers that a delay in issuing the direction would be prejudicial to the public interest. In such a scenario, ASIC is able to issue an interim direction which will expire at the end of a 21 day period. An interim direction can be issued in similar unconfined terms.
ASIC’s direction or interim direction can be subject to administrative review through the Administrative Appeals Tribunal if the licensee wished to challenge ASIC’s decision. Notwithstanding this, it is uncertain what can practically be reviewed. It would be a high bar to challenge the decision on the basis that the jurisdictional fact does not exist, given the “reason to suspect” threshold.
ASIC must consult with APRA before issuing the direction if the licensee is a body that is also regulated by APRA, however, failure to do so will not invalidate the direction.
Compliance with the direction
It is contemplated that the licensee will not be acting in breach of its licence conditions merely because it engages in conduct necessary to comply with ASIC’s direction. This offers some form of defence against a contravention of s 912A(b) of the Corporations Act. An interesting question remains as to whether a direction which requires the licensee to act in potential contravention of other obligations under the Corporations Act or Credit Act would be beyond ASIC’s power.
Failure to comply with a direction is a contravention of the legislation and is a civil penalty. This is in addition to any contravention of financial services law or credit legislation as a result of the underlying conduct the subject of the direction. Failure to comply with a direction may also trigger obligations to report breaches under the Corporations Act.
The draft Bill and explanatory memoranda can be found here. The consultation period for the proposal ends on 28 February 2020.
Explore our Royal Commission hub to keep up-to-date, access related content and view additional resources.
We are happy to assist you in considering the proposal and how it impacts to your business. Please contact your usual KWM contact if you would like to discuss the report further.
 See e.g. Goldie v Commonwealth of Australia  FCA 433 at -.
 See e.g. Howarth v ASIC (2008) 101 ALD 602;  AATA 278 at 
 See Part 9.4A of the Corporations Act and sections 327 and 328 of the National Consumer Credit Protection Act.