A US state of mind: the end of conciliatory financial regulation in Australia

We have witnessed the end of conciliatory financial regulation in Australia. Following criticism in the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, ASIC has reinvented its enforcement function as one which looks remarkably similar to the aggressive posture favoured for decades by the US Securities and Exchange Commission (SEC).

As a result, prosecutions will be more frequent, penalties have multiplied and companies will no longer avoid admissions of guilt by striking settlement deals with the regulator.

In his final report on the Royal Commission, Commissioner Kenneth Hayne recommended that ASIC assess every suspected contravention for whether the penalty should be determined by a court.

Many had criticised the regulator for treating litigation as a last resort. ASIC blamed this policy in part on a lack of funding to conduct court proceedings, while the courts themselves have observed that the penalties able to be imposed were ‘inadequate’ by ‘an order of magnitude’.[1]

Now, however, these barriers have been substantially overcome.

In April’s Federal Budget, the Commonwealth Government allocated $404.8 million over four years for ASIC to implement a more aggressive enforcement strategy. In March, legislation was amended to dramatically increase civil penalties, which can now reach $525 million for a corporation.[2] Further, civil penalties are now available in respect of a greater number of contraventions.

“Why not litigate?”

Now properly funded and empowered (and a little chastened), ASIC has released an update on its implementation of Royal Commission recommendations, in which its Chairman James Shipton declared ASIC’s new mantra to be “why not litigate?”.

The SEC, of course, has been doing this for decades with its dedicated Division of Enforcement. As outlined in its update, ASIC will this year follow the lead of the US and establish an Office of Enforcement aimed at ‘deterrence, public denunciation and punishment of wrongdoing by way of litigation’.

This new Office has substantially adopted the five principles that guide the SEC’s enforcement division. Where the SEC seeks remedies that will ‘most effectively further [its] enforcement goals’, which has always meant litigation, ASIC will now focus on what it calls the ‘clear benefits of a… court-based outcome’.

ASIC will still offer enforceable undertakings but is likely to adopt Commissioner Hayne’s recommendation to require an admission of wrongdoing. Again, this is routine for the SEC, and is critical if ASIC is to position itself as a regulator to be feared, not appeased.

What’s next?

ASIC once sought to educate and persuade regulated entities to comply with the law, and reserved severe punishment for the most egregious cases. But education and persuasion are effective only when regulated entities perceive that there is a consequence for failing to comply. ASIC’s educative function has been undermined by its inability or reluctance to impose penalties.

In this sense, ASIC’s new punitive approach does not see it abandoning its role as persuader. To the contrary, a more forceful regulator will signal its capacity to impose penalties and dissuade regulated entities from conduct deserving of punishment.

By this, we may see ASIC close one of the remaining gaps with the SEC – that is in respect of the target of its enforcement activity. ASIC has an outsize focus on small businesses and, as the Royal Commission found, an ambivalence toward prosecuting financial advisors. On the other hand, more than one-fifth of the SEC’s work is focussed on investment advice, and a quarter relates to securities offerings. If ASIC can convince its smaller regulatory targets to comply merely because it is possessed of more punitive powers, it will likely focus its enforcement efforts on the ‘big end of town’.

In the remarkably short time since the Royal Commission, we have seen ASIC follow the lead of its US counterpart, the SEC. Australian corporates and their boards need to urgently prepare for a world in which their US counterparts have existed for decades – one where the corporate regulator needs to be respected, and feared.

_{[1] ASIC v Westpac Banking Corporation (No 3) [2018] FCA 1701
[2] Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth); Corporations Act 2001 (Cth) section 1317G (4)(c)(ii)}