Key Points
- The Australian Securities and Investments Commission ("ASIC") has released its Corporate Plan for 2015–16 to 2018–19 which raises a number of key challenges such as:
- gatekeeper culture;
- balancing consumer protection with a free-market based system;
- technology—cyber attacks and digital innovation; and
- globalisation.
- ASIC has released its report on enforcement outcomes for January to June 2015 which provides an insight into the level of ASIC activity and areas of focus.
- ASIC has determined to more routinely utilise its power to make an order to recover investigation expenses and costs where that investigation has led to a successful prosecution or civil proceeding against a person.
ASIC Strategic Priorities
ASIC has released its Corporate Plan for 2015–16 to 2018–19 which sets out its strategic priorities as being to:
- `promote investor and financial consumer trust and confidence;
- ensure fair, orderly, transparent and efficient markets; and
- `provide efficient and accessible registration.
These priorities are essentially the same as those previously
adopted, with the exception that efficiency has been added as a
goal in relation to markets.
ASIC explains that it employs a "detect, understand and
respond" approach with the response including education,
guidance, surveillance, enforcement and policy advice to the
government. However, ASIC also takes the view that it is a law
enforcement agency with 70 percent of its regulatory resources
devoted to surveillance and enforcement.
Key Challenges
Gatekeeper Culture. Culture has attracted
significant attention after the global financial crisis and the
rigging of financial benchmarks such as LIBOR. ASIC's report on
enforcement outcomes for January to June 2015 defines
"culture" as a set of shared values or assumptions which
can influence an organisation's attitudes and behaviours toward
clients and compliance.
ASIC uses the term "gatekeepers" broadly to include
directors, auditors, insolvency practitioners, the responsible
entities of managed investment schemes, lenders, market operators
and participants including issuers, brokers and investment
banks.
ASIC's focus on culture will include specifically targeting the
following:
- reward and incentive structures, including training, promotions and remuneration;
- whistleblowing policy;
- conflicts of interest;
- handling of confidential information; and
- corporate governance frameworks and compliance systems.
ASIC also makes clear that a major focus will be "holding
gatekeepers to account". While seeking to pre-empt
contraventions through correcting culture is a focus of ASIC, it
will also rely on the traditional approach of
enforcement.
Balancing Consumer Protection with a Free-Market Based
System. In addition to the focus on gatekeepers, ASIC will
also seek to improve the resilience and knowledge of consumers.
This is planned to occur through improving financial literacy and
seeking to understand consumer decision-making through behavioural
economics and cognitive limitations that give rise to bounded
rationality.
Technology—Cyber Attacks and Digital
Innovation. Cyber attacks are seen as a systemic risk
because they destablise markets. ASIC reports that in 2013, cyber
attacks affected five million Australians at an estimated cost of
A$1.06 billion, and the estimated annual cost of cyber attacks to
the global economy is more than US$400 billion.
ASIC will place a greater focus on increasing awareness of
this issue and assisting regulated entities to identify potential
weaknesses. Regulated entities will need to take steps to protect
themselves and be mindful of reporting
obligations.1
Digital innovation can provide new ways to raise funds and invest.
Current examples of digital innovation include:2
- peer-to-peer lending/marketplace lending;
- robo-financial advice;
- crowd funding, and
- payment infrastructures (e.g. digital currencies and Apple Pay).
However, digital innovation is seen as a risk by ASIC where
consumers misunderstand the financial products or services on
offer, including costs and risks, or complex products are mis-sold
to consumers.
While ASIC employs technology as an aid to its enforcement efforts,
such as its Market Analysis Intelligence (MAI) system that gathers,
matches and analyses data to detect suspected misconduct in real
time, this may be substantially increased through ASIC being one of
the agencies authorised to view metadata retained by
telecommunications companies pursuant to the Telecommunications
(Interception and Access) Amendment (Data Retention) Act 2015
(Cth).
Previously ASIC could access telecommunications data (e.g. who
called whom and when) and, via warrant, stored communications in
order to investigate white collar crime. These avenues will
continue to exist, but in addition, metadata for the past two years
will be maintained by Australian telecommunications companies and
accessible by ASIC.
Globalisation. Inbound and outbound cross-border
investment linked to Australia is growing. The impact is explained
by ASIC as follows:
In the March quarter of 2015, 45% of Australian listed equities
were held by foreign investors. Over the past decade, the
proportion of non-financial corporate debt issued offshore has
risen strongly to 75% as at June 2015. The total level of
Australian investment abroad reached $2.1 trillion in the March
quarter of 2015, split almost equally between equity and debt
investments. This represents a 23% increase from the level a year
before.
This has a number of consequences. Overseas investors require an
understanding of Australian law, in particular the relevant
regulatory regimes that govern, and outbound investors need to
understand the jurisdictions in which they are investing. Concern
has also been expressed about global misconduct or misconduct that
crosses borders such as Ponzi schemes in off-shore locations. This
may see regulators cooperating in both investigations and
enforcement matters.3
Recent Enforcement Activity
ASIC's report on enforcement outcomes for January to June
2015 advises that during that period, ASIC:
- commenced 136 investigations;
- completed 137 investigations;
- charged 10 individuals with a total of 82 criminal charges;
- banned 25 individuals from the financial services or credit industries;
- accepted six enforceable undertakings; and
- disqualified 19 directors.
In the previous six months, 1 July 2014 to 31 December 2014,
ASIC commenced 94 investigations. It also completed 94
investigations. It charged 14 individuals with a total of 173
criminal charges. ASIC also banned and suspended individuals from
the financial services industry, accepted enforceable undertakings
and disqualified 16 directors.
Directors and Officers. In the January to June
2015 period, directors and officers were subject to the following
penalties:
- sentencing a chief financial officer who knowingly made available false or misleading information about the affairs of the corporation to 18 months' imprisonment, wholly suspended;
- banning a director for breach of his director's duties and failing to comply with financial services laws from managing corporations for five years, and from providing financial services for seven years;
- sentencing a person who managed a company while disqualified to six months in jail, wholly suspended, upon entering into a three-year good behaviour bond; and
- sentencing a person who lodged false documents and obstructed ASIC to eight months' imprisonment, to be served by way of an intensive correction order.
Market Integrity. ASIC continued its
prosecutions in relation to insider trading with two criminal cases
in the period. There were also two criminal cases in relation to
market manipulation. Administrative remedies were also deployed in
relation to market manipulation, continuous disclosure and market
integrity rules.
Financial Services. In the first half of 2015,
ASIC achieved five criminal outcomes, 25 financial services or
credit bannings, seven licence cancellations and suspensions and 49
infringement notices.
Recovering the Cost of Investigations
Generally, ASIC must pay the expenses of investigations it
conducts. However, under s 91 of the Australian Securities and
Investments Commission Act 2001 (Cth), ASIC may make an order
to recover investigation expenses and costs where that
investigation has led to a successful prosecution or civil
proceeding against a person.
This power allows ASIC to make an order to recover investigation
expenses and costs, including, for example:
- salary costs for ASIC staff who have worked on the investigation;
- travel expenses when ASIC has needed to interview witnesses;
- the cost of external legal counsel; and
- the cost of employing an expert to perform an analysis.
Investigation expenses and costs are not the same as litigation
costs that may be awarded by a court.
ASIC has issued Information Sheet 204, Recovery of
investigation expenses and costs (July 2015) which sets out
how ASIC will determine whether to seek recovery of its costs. The
factors to be considered by ASIC include:
- impecuniosity of the person;
- exceptional hardship to the person;
- the amount recoverable;
- extent of ASIC's success in the proceedings, including the degree of culpability proven against the person;
- likely effect on victims, such as whether it may impede the provision of compensation; and
- degree of cooperation.
ASIC will also provide a person against whom they are
considering making an order an opportunity to make submissions in
relation to the order and its quantum. A decision by ASIC to issue
an order can be the subject of an application for review to the
Federal Court of Australia under the Administrative Decisions
(Judicial Review) Act 1977 (Cth).
The new approach will apply to investigations from 29 July 2015 as
well as all investigations started before this date, where an
outcome has not yet been agreed.
ASIC's new policy will create a further cost that may be used
to seek to persuade entities subject to investigation to co-operate
with ASIC. Directors and officers will also need to check that
their insurance responds to this new category of costs.
Footnotes
1 See ASIC, "REP 429 Cyber resilience: Health check" (19 March 2015).
2 See Greg Medcraft, Chairman, Australian Securities and Investments Commission, "Stability in prudential regulation and the impact of new technologies on market dynamics", Boao Forum for Asia, Sydney, Australia, 30 July 2015.
3 See Peter Kell, Deputy Chairman, Australian Securities and Investments Commission, "The changing perimeter of securities regulation: The perspective from Australia", Berle V Conference, Capital Markets, the Corporation and the Asian Century: Governance, Accountability and the Future of Corporate Law, Sydney, 13 May 2013.
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