‘Why litigate?’ Financial services regulatory enforcement in the wake of ASIC’s new Corporate Plan

By Jacob Uljans and Jonathon Brooking

ASIC’s 2021-2025 Corporate Plan sounds a death knell for the uncompromising ‘why not litigate?’ enforcement approach that ASIC adopted in response to the Hayne Royal Commission. In this update, we explore the changes that financial services businesses can expect to see in ASIC’s approach to exercising its investigative and enforcement functions and powers.

Key points

• ASIC has now reversed course on its ‘why not litigate’ enforcement approach, in alignment with the Federal Government’s expectations, and has committed to using its ‘full suite’ of regulatory enforcement powers in a targeted and proportionate way
• Enforceable undertakings and other non-litigious outcomes are now back in play, with enforcement action to be taken only where warranted
• New areas of enforcement focus for ASIC include:
  • marketing and disclosure by investment managers, with ASIC to proactively review Product Disclosure Statements (PDS) issued by entities with a history of poor disclosure; and
  • pricing misconduct in the general insurance sector, including miscalculation of premiums.
• ASIC continues to maintain an enforcement focus in other areas of financial services, including poor product governance or design, mis-selling and failures to comply with conflict of interest and disclosure requirements. Investment scams and inadequate cyber risk mitigation will also continue to attract close scrutiny
• We expect that as a result of this shift in focus by ASIC:
  • civil penalty litigation over technical or fully-remediated breaches will diminish significantly;
  • there is now greater scope to engage productively with ASIC during the course of investigations; and
  • ASIC will continue to pursue litigation and court outcomes in its areas of focus, particularly where misconduct is serious or harms confidence in markets, and where consumers (particularly vulnerable consumers) have suffered substantial harm.

ASIC released its 2021-2025 Corporate Plan on 26 August 2021. The Corporate Plan was much anticipated, particularly given various recent indications that the regulator was softening its ‘why not litigate?’ enforcement approach. It has not disappointed in this regard – the new approach to regulatory enforcement prioritises the promotion of Australia’s economy and the ‘targeting’ of regulatory and enforcement action ‘to areas of greatest harm’, and excludes any mention of ‘why not litigate?’

ASIC’s new Corporate Plan was released alongside a ‘Statement of Intent’, which responds to a ‘Statement of Expectations’ issued to ASIC by the Federal Government and confirms – among other things – that ASIC will act consistently with the policies of the Government. This involves prioritising support to business, reducing regulatory ‘red tape’ and otherwise facilitating the economic recovery from COVID-19.

In his introductory message for the Corporate Plan, ASIC’s new Chair, Joe Longo, highlights ASIC’s role in supporting the Australian economy and minimising the cost of regulatory interactions, while also promoting market integrity and protecting Australian consumers and investors from harm. The Corporate Plan itself refers repeatedly to ASIC using its ‘full suite’ of regulatory tools (including non-judicial outcomes), and doing so in a ‘targeted and proportionate way’ and only ‘where appropriate’.

This represents a significant change in ASIC’s approach to regulatory enforcement, which paves the way for more productive cooperation by regulated businesses with ASIC during the course of investigations and a more flexible and proportionate approach by the corporate regulator to resolving investigations where issues have been identified. However, ASIC can be expected to continue to use litigation to pursue harsher sanctions where serious misconduct is identified that adversely impacts consumers or harms confidence in markets.

Why not litigate?

In the wake of criticism by Commissioner Hayne of ASIC’s perceived underutilisation of civil penalty litigation (and the rarity of referrals for ‘white collar’ criminal prosecution) in dealing with misconduct in the financial services sector, in October 2018 ASIC adopted a much tougher approach, described as ‘why not litigate?’ The ‘why not litigate?’ enforcement approach applied where ASIC considered breaches of the law were likely to have occurred, and that pursuing the matter would be in the public interest, in which case ASIC’s default position was to litigate unless there was a good reason not to. ASIC viewed its role in this regard as exercising a quasi-prosecutorial discretion.

Previously, ASIC was much more open to resolving investigations into the entities it regulates on the basis of negotiated and non-litigious outcomes, such as enforceable undertakings, or issuing infringement notices. The impact on the number of enforceable undertakings entered into by ASIC before and after ‘why not litigate?’ is stark.  ASIC records indicate that it has only entered into five EUs since 2018, whereas previously it had entered into 20 in 2018, 23 in 2017 and 23 in 2016. Similarly, between 2016 and 2018, ASIC issued 26 entities with infringement notices (colloquially described as ‘speeding tickets’) in respect of credit and ASIC Act infringements, but only two in 2019 and none since then.

An uncompromising enforcement approach that prioritised litigation as the primary enforcement mechanism, alongside significant boosts to ASIC’s investigative and enforcement powers, the expansion of the civil penalty regime and substantial increases in the quantum of civil penalties, proved to be a potent combination. Civil penalty actions commenced by ASIC significantly increased,  particularly as a result of referrals from the Hayne Royal Commission. The number of civil penalty proceedings initiated in the second half of 2020 was 64% higher than in 2018, with a record quantum of civil penalties also being imposed by courts in this period (albeit inflated by two very large penalty decisions). As at 1 January 2021, there were 61 civil penalty actions afoot against financial services entities, and ASIC has commenced further civil penalty actions since then.

Dialling back ‘why not litigate?’ and the 2021-2025 Corporate Plan

Of course, the cost of this litigation-first approach to enforcement, and the many legal proceedings it spawned, was very significant – and inevitably unsustainable for ASIC, even leaving aside recent cuts to its budget associated with the loss of its business registration function. There were clear signs that ASIC was already beginning to water down its ‘why not litigate?’ approach some months ago.

In June 2020, ASIC announced a temporary change in its regulatory work and priorities in response to COVID-19. This involved ASIC shifting its resources and focus towards ‘issues of immediate concern’; relevantly, ‘maintaining the integrity of markets’ and ‘protecting vulnerable consumers’. Implicit in this announcement was that ASIC would likely be less vigorous in its pursuit of punitive remedies for technical regulatory breaches where those breaches did not result in harm to consumers.

Earlier this year, ASIC announced a new ‘express investigation’ approach to regulatory enforcement, with Deputy Chair Karen Chester noting the ‘opportunity cost’ associated with regulatory litigation and promoting the benefits of cooperation and early engagement with ASIC in respect of its investigations.

The 2021-2025 Corporate Plan marks the completion of ASIC’s withdrawal from ‘why not litigate?’ as its default approach to regulatory enforcement.

What can financial services businesses expect of future ASIC enforcement activity?

Despite ‘why not litigate?’ being consigned to history, ASIC is committed to continuing as an ‘active litigator against misconduct’. However, litigation (and in particular, civil penalty proceedings) will be reserved for cases involving the most substantial harm – to market integrity, to investors and to consumers. Accordingly, technical breaches of legislation, or misconduct that was inadvertent and where any investor or consumer losses were proactively remediated, are unlikely to be the focus of future litigation by ASIC under this new approach.

The ‘express investigation’ regime, and the renewed availability of negotiated remedies such as enforceable undertakings, suggest that the potential benefits of early engagement with ASIC in connection with its investigations are now greater than was the case when ASIC’s prima facie position was to litigate.

In addition to the fundamental change in enforcement approach, the new Corporate Plan provides further insight into ASIC’s areas of focus regarding regulatory investigations and enforcement. Of note for financial services businesses is ASIC’s new focus on marketing and disclosure by investment managers, with ASIC intending to proactively review PDS documents issued by entities with a history of poor disclosure, and on pricing misconduct in the general insurance sector, including miscalculation of premiums.

Superannuation fund trustees will also be potentially exposed to regulatory action for non-compliance with mandatory fund underperformance notifications related to the ‘Your Future, Your Super’ reforms. Products that exploit consumers by offering little or no benefit, poor debt collection practices and misconduct regarding product intervention orders are also areas of focus for ASIC from an enforcement perspective.

Overall, ASIC’s decision to end ‘why not litigate?’ and to be more targeted and proportionate in its use of its wide-ranging enforcement powers is a welcome development.

The new approach will enable ASIC to continue to take appropriate action in response to egregious and harmful misconduct, while allowing for more balance in responding to technical or inadvertent contraventions where the entity concerned has promptly remediated any persons impacted.

We also expect this will assist in facilitating productive engagement during investigations between the corporate and financial services regulator and those entities it regulates.