ASIC dismissing misconduct reports in 40 seconds

The final ASIC report has found 93 per cent of reportable situation reports made by Australian financial services licensees (AFSLs) were assessed as requiring no action in 2022–23, representing more than 26,000 reports.

The report, which followed 20 months of inquiry by the Senate standing committee on economics, made 11 recommendations across ASIC’s enforcement and conduct. 

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AFSLs are required to report reportable situations (previously known as breach reports) to ASIC within 30 calendar days. These cover matters such as negligent conduct, breaches of core obligations, conduct of financial advisers, and outcomes of breach investigations.

However, there has been pushback from the industry as to how much the classification of a reportable situation encompasses.

Some 28,493 reportable situations were reported to ASIC during 2022–23 plus a further 160 which made about another licensee, but the regulator said 93 per cent of those were assessed as requiring no further action. 

This is up from 50 per cent which required no further action in 2011–12.

“ASIC explained there has been a significant rise in the number of breaches and the ‘no further action’ rate for reportable situation reports is ‘naturally correlated with the increase in reports received’.”

Referencing public submissions made, the report flagged comments made by Cheyenne Walker, managing director of the Australian Independent Compliance Solutions, who described “heartache” among advisers.

“There is so much heartache with the advisers in trying to deem if something that is reportable or not; that is reporting breaches and then having no responses, or having breaches that are investigated but where there doesn’t seem to be much client harm, or anything associated with that. It is just not working practically, even though in theory it should be a good idea,” she told the committee in August 2023.

Organisations including the Financial Advice Association of Australia and Financial Services Council reported that the regulator was overloaded with reports received, many of which related to administrative or technical matters as a result of the wide variety of matters classed as being reportable.

Misconduct

As well as reportable situations reports, ASIC also receives thousands of misconduct reports from the public each year and is unable to thoroughly investigate these, with most resulting in no further action.

These reports from the public cover areas such as director misconduct, investment scams, misleading or deceptive conduct, and inappropriate financial advice.

For the FY22–23, 14 per cent of misconduct reports were referred for further action, of which 8 per cent were resolved.

This ties into comments made by advisers that they reported concerns over matters such as Courtenay House and Sterling Group long before the matters came to be investigated but were ignored.

“ASIC receives tens of thousands of misconduct reports each year, yet over the last five years ASIC has only commenced an average of 127 investigations per year,” Senator Andrew Bragg wrote.

“ASIC generally responds to these statutory reports with an automated, ‘no further action’ email within 40 seconds of the report being made.

“ASIC’s response to most reports of alleged misconduct is to take no further action and only a fraction of reports are investigated. For the matters where ASIC proceeds to take enforcement action, the civil penalties imposed are often at odds with the scale of the offending, and few criminal sanctions are achieved.”

The regulator said it takes a “risk-based approach” to handling reports of misconduct where investigation and enforcement resources are allocated to matters that involve the most serious harm. 

Reports from the public are triaged via technology and manual methods, and assigned a risk rating that correlates to ASIC’s strategic and enforcement priorities or the egregiousness of the conduct. Reports via reportable situations are automatically assigned a risk score and are subject to selective review by ASIC.

“As with the concerns raised about ASIC’s investigations, there is a sense that ASIC is a ‘black box’ when it comes to enforcement. Actions are commenced or not commenced based on an opaque set of considerations which are not visible to the public. This leaves the people who reach out to ASIC for help feeling helpless and lost in an already complex legal and regulatory system.”

The committee’s final report recommended: 

“The committee recommends that the Australian government urgently address the shortcomings in Australia’s system for handling reports of alleged corporate misconduct. In doing so, the committee recommends that the Australian government make it a legislative requirement of the Australian Securities and Investments Commission or future regulatory authorities to investigate reports of alleged misconduct at an appropriate rate. 

“Further, the committee recommends that:

• the regulator develop consistent standards to transparently report data to the public on the handling of reports of alleged misconduct; and 
• the regulator establish service standards to require that people who submit reports of alleged misconduct are provided with clear, detailed and timely information on the tangible actions taken in response to their report.”