The Final Report for the Royal Commission: Creating a beast that reaches beyond the financial sector

Commissioner Kenneth Hayne’s final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released yesterday to reveal his recommendations to re-install public trust in the conduct, practices, behaviour and business activities of the Industry.

 

In the anticipated wait for the final report to be released, the industry and regulators have been contemplating the Commissioner’s open-ended questions on the issues in the industry as set out in his interim report.  For the regulators and particularly ASIC, the Commissioner was heavily critical of their failure to take action against banks and superannuation providers.

The final report has now shed light on the recommendations for regulators, with the Commissioner making 76 recommendations.

Watching the watchmen: ASIC must bare its teeth

The Final Report provided a number of recommendations as to how ASIC performs its regulatory role.  One of the questions being whether breaches of the Corporations Act should be litigated, or ASIC should reach a negotiated agreement.  On this issue, the Commissioner recognised the inherit risks of litigation and noted that it is tempting to negotiate a settlement to avoid these risks.  However, he stated in the final report:

“litigation of the kind now under consideration is the exercise of public power for public purposes.  It is litigation by a public authority to enforce the law.  A private plaintiff can always choose not to pursue, to abandon or to compromise that plaintiff’s private rights.  A private plaintiff may take any of these steps for any reason or no reason.  But altogether different considerations arise in connection with the public enforcement of the law.

Breach of the law carries consequences.  Parliament, not the regulators, sets the law and the consequences.  There are cases where there is good public reason not to seek those consequences.  Prosecution policies have always recognised that there may be good public reasons not to pursue a particular case. But the starting point for consideration is, and must always be, that the law is to be obeyed and enforced.  The rule of law requires no less.  And, adequate deterrence of misconduct depends upon visible public denunciation and punishment.”

Accordingly, the Commissioner is inviting ASIC to take a more aggressive stance in its approach to litigation.  As ASIC is to enforce the law, it should be more inclined to do so through litigation.

As explored in our previous article, ASIC has recently made statements that it will take a strong stance to litigate first following the Commissioner’s suggestions in the interim report.  These criticisms were based on ASIC’s preference to negotiate enforceable undertakings as opposed to litigating.  The Commissioner made reference to this in the final report, pushing ASIC to adopt a policy of only accepting an enforceable undertaking in circumstances where the party offering it acknowledges that it has breached the law.

The Commissioner also recommended that infringement notices, functionally fines issued by ASIC, should only be used for administrative failures, and that where an evaluative judgment has to be made about a party’s conduct, or the party is a large corporation, they will not be enough to properly enforce compliance.

Feeding the beast: giving ASIC and the Courts the tools for the hunt

In response to the Final Report, Treasurer Josh Frydenberg has indicated that the Morrison Government will be increasing ASIC’s resources stating that they will introduce “the legislative framework necessary, providing the regulators with the powers and the resources to hold those who abuse our trust to account”.

Mr Frydenberg has also stated that the government has further committed to an expansion of the Federal Court’s jurisdiction in relation to criminal corporate crime in order to “ensure prosecution of financial crimes does not face delays as a result of heavy caseloads in the courts".  This is in the context of the government’s recent provision of $70.1 million for ASIC’s enforcement capabilities and supervisory approach to pursue criminal prosecutions for financial misconduct and $41.6 million to the Commonwealth Director of Public Prosecutions to prosecute briefs from ASIC.

Other recommendations: where are the claws being sharpened?

The Commissioner also made a number of other recommendations regarding the powers and responsibilities of the regulators.  These include:

  • The “twin peaks” model of ASIC and APRA for financial regulation should be retained;
  • ASIC should take as its starting point to its enforcement the question of whether a court should determine the consequences of a contravention;
  • ASIC will be given the power to enforce all provisions in the Superannuation Industry (Supervision) Act 1993 that are, or will become, civil penalty provisions;
  • A new oversight authority should be established by legislation for APRA and ASIC, independent of the government, to assess the effectiveness of each regulator, and will be required to report to the minister twice a year;
  • APRA and ASIC should be subject to capability reviews at least once every 4 years;
  • The recommendations of the ASIC Enforcement Review Taskforce made in December 2017 that relate to self-reporting of contraventions by financial services and credit licensees should be carried into effect. These notably include;

    • Clarifying the ‘significance test’ in section 912D of the Corporations Act 2001 to ensure that the significance of breaches is determined objectively  rather than subjectively;
    • Introducing a self-reporting regime for credit licensees equivalent to section 912D of the Corporations Act 2001;
    • The obligation for licensees to report should expressly apply to misconduct by an employee or representative;
    • Significant breaches (and suspected breach investigations that are ongoing) must be reported within 30 days;
    • Increasing Criminal penalties for failure to report as and when required; and
    • Introducing a civil penalty option in addition to the existing criminal offence for failure to report as and when required.
  • It was also foreshadowed of a future recommendation of a specialist civil enforcement agency depending on ASIC’s progress in reforming its enforcement function.

Guiding you through the jungle: how does this effect you?

The effect of the final report on the financial industry is obvious, but its aftershock will no doubt have resounding impacts on corporate governance beyond the financial sector.  The Commissioner’s push for enforcing deterrence through the judicial system along with the Government (and Opposition’s) support for the recommendations may result in the dawn of a new age of regulatory attention on corporate governance.

The final report acts as a reminder for companies, and particularly directors, of the importance to monitor regulatory compliance and to avoid complacency about risk to ensure they avoid the ire of the regulator’s sharpened focus.

McCabe Curwood is experienced in advising its clients on regulatory compliance.  Company directors would be wise to seek advice now to ensure that they are complying with their duties.

Contributors

Luke Dominish Lawyer
Jennifer Bradley Lawyer