Why not litigate: Empty threat or a sign of a teething tiger?

The Australian Securities and Investments Commission (ASIC) may say it has toughened its enforcement approach, but its track record in securing the convictions and fines that matter suggest that, for now at least, these are empty words.

In the wake of a damning Banking Royal Commission, in which ASIC chair, James Shipton, admitted the regulator should’ve pursued some matters more seriously and Commissioner Kenneth Hayne recommended that it toughen its approach to punishing wrongdoing, ASIC adopted a ‘why not litigate’ approach to pursuing legal penalties.

The Commission took steps to act on this promise, too. It appointed renowned QC, Daniel Crennan, as its head of enforcement, although the barrister has admittedly since come under fire from the Law Council. It also upped the ante on its Australian Financial Services License (AFSL) suspensions; once seen as a soft response targeted at the small end of town, consecutive bans of five or more years show that ASIC is trying to show its teeth.

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However, it’s not really the sole practitioners or small AFSL practices that are committing the level of misconduct that ASIC has been accused of going soft on. Rather, it’s the big players, the banks and IOOFs and AMPs. And while ASIC’s fellow regulator, the Australian Prudential and Regulation Authority (APRA) has taken a heavy hand to IOOF since the Royal Commission, it remains to be seen whether the former will act with similar strength.

The ‘why not litigate’ approach to litigating suggests that the courts will be seeing a lot more action from ASIC, both in civil and criminal matters, but the regulator’s bar as to what is a worthy penalty to seek or breach to prosecute has thus far been low.

In the second half of last year, which is the most recent period for which enforcement outcome data is available for ASIC, the total value of the various financial impositions it made following legal breaches was worth less than $32 million.

Less than half of this – $12.7 million – was for civil penalties imposed by the courts. The remainder was in infringement notices, compensation and remediation, and community benefit fund payments negotiated by ASIC. Nine court enforceable undertakings were also entered.

From a criminal perspective, 76 criminal charges were laid as a result of investigations by the regulator, distributed amongst nine individuals. A further 185 people were charged in summary prosecutions for strict liability offences, meaning potential orders by the court would be comparatively minimal to those imposed in indictable matters, for a total of 433 charges.

For prosecutions resolved by the courts in this six-month period, ASIC achieved six custodial sentences, of which four resulted in imprisonment, and six non-custodial sentences.

These are hardly the results of a regulator with teeth. There seems to be a certain lightness of touch in investigations leading to litigation, when you consider that in the same time period, ASIC commenced 75 and completed 57 investigations.

Of course, this isn’t all the regulators’ responsibility. The decision to seek summary over indictable charges, for example, would likely be determined by the crown prosecutors or even legislation itself. The worthiness of some of the more developed investigations to be litigated may also have been small.

For a regulator that is positioning itself to always seek litigation unless there is an active reason not to, however, these are hardly reassuring figures. The ‘why not litigate’ approach may not have been formalised at the time of these enforcements, but the Royal Commission was well underway and pressure on ASIC to seek stronger outcomes had been building literally for years.

Further, the law is in ASIC’s favour when it comes to these large prosecutions. Since the Banking Royal Commission started, moves have been made to enable the regulator to pursue harsher civil penalties and criminal sanctions against banks, their executives, and others who have breached financial services and corporate law.

Cost shouldn’t be an issue, either. While these cases are expensive to run – a reason for pursuing enforceable undertakings in such matters previously cited by the regulator – both sides of the aisle in Canberra have made it clear that ASIC will get the backing it needs.

Its removal from the umbrella of the Public Service Act to allow the Commission to compete with private firms for talent is proof that the Parliament intends to follow through with its promises of support, as does Treasurer Josh Frydenberg’s commitment of $404 million in additional funding for ASIC over the next four years.

According to Crennan, this funding will be crucial to the Commission as it puts its ‘why not litigate?’ approach into effect, as well as enabling its deployment of enhanced regulatory approaches. What remains to be seen, is whether ASIC itself will be able to outgrow its own baby teeth to sink its fangs into the big end of town.




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