In brief: The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Interim Report, and a raft of announcements at the federal level over the past 12 months, point clearly to a more robust enforcement environment for corporate Australia in 2019 and beyond. Partner Paul Nicols (view CV), Senior Overseas Practitioner Chris Kerrigan and Associate Samantha Naylor Brown report.
As 2018 draws to a close, the Royal Commission Interim Report has given an indication as to the Commissioner's likely recommendation on enforcement activity in the financial sector: more court proceedings and more penalties.
The Federal Government and regulators have – through a range of measures and announcements described below – already reacted to criticism in the Royal Commission and other fora relating to the perceived lack of enforcement activity against corporate misconduct.
Corporations should prepare themselves now for more interactions with regulators and enforcement agencies that have a greater appetite for, and means to pursue, enforcement outcomes. For many, this is likely to mean increased budgets and personnel numbers for regulatory response teams, and a more structured approach to investigating alleged misconduct and interacting with regulators. For some, it is also likely to mean substantially revised risk and compliance approaches, to put the organisation in the best possible position when responding to increased enforcement activity (or to avoid such activity in the first place).
Last month, the Australian Prudential Regulation Authority (APRA) announced its own enforcement strategy review, due to report by the end of March 2019.
APRA, ASIC and, most recently, the Commonwealth Department of Public Prosecutions (the CDPP) and the Federal Court, have all received significant funding increases.
ASIC has recently announced a new supervisory approach that involves embedding ASIC officers in major financial institutions.
APRA and ASIC have each appointed new deputy chairs with a focus on enforcement approaches and policy.
The Government is considering vesting the Federal Court with a broader criminal jurisdiction in relation to corporates.
The Government has also announced the establishment of a Committee of Regulatory Enforcement Strategy, to be chaired by the Attorney-General's Department.
One point highlighted in the Interim Report was ASIC's failure to take any steps to prosecute licensees for contraventions of the breach reporting obligation in the Corporations Act. As such, the first cab off the rank for ASIC enforcement action may be for failures to identify and report breaches. A recent ASIC review into breach reporting in the financial sector identified significant delays in investigating potential breaches and reporting actual breaches. In its media release about the review's findings, ASIC flagged that it is actively considering enforcement action for failures to report breaches on time,3 and it has recently announced that it will embed staff in major financial institutions, with a focus on breach reporting (see our Unravelled article on close and continuous monitoring).
For more on the Royal Commission's Interim Report, see our special edition of Unravelled.
Although the Royal Commission's mandate is limited to the banking, superannuation and financial services sectors, recommendations relating to ASIC are likely to have broader consequences for enforcement activity outside of these sectors.
The CDPP will receive the majority of the additional $51.5 million allocation, with $41.6 million to be provided to it over eight years. The Federal Court will receive the remaining $9.9 million over four years. Little detail has been provided on exactly where that funding will be directed, but media releases and statements from the Treasurer of the Commonwealth of Australia suggest that we can, at least, expect to see two additional judges appointed to the Federal Court to hear civil cases, and an increase in the number of CDPP prosecutors hired.
ASIC's additional $70.1 million is made up of a package of measures, including $26.2 million to increase its enforcement activities. For APRA, its additional funding is also directed more broadly, but at least part of it is intended to fund a review of its enforcement strategy (see below).
APRA's enforcement strategy review will be led by APRA Deputy Chair John Lonsdale, with assistance from an independent advisory panel comprising a former NSW Supreme Court judge, an ACCC commissioner, and a UNSW law professor specialising in markets and regulation.
APRA's decision-making process when determining whether to take enforcement action.
Perhaps anticipating a finding by the Commission that more criminal prosecutions should be brought against corporations, the Federal Government has announced a review to consider whether the Federal Court's jurisdiction should be expanded to include corporate crime, on the basis that the court may be able to handle cases more quickly and efficiently than state courts.16 The Attorney-General's Department will conduct the review, and will provide its report to the Government in January next year, just before the February publication of Commissioner Hayne's final report on his findings from the Royal Commission.
The Federal Government also announced in November that it will establish a Committee of Regulatory Enforcement Strategy to be chaired by the Attorney-General's Department. Other representatives will include 'relevant agencies that regulate the financial services sector' – presumably, ASIC and APRA will both get a seat at the table. The Committee will meet regularly, and will report to the Government on regulatory and civil enforcement policy.
regulators that are less amenable to agreeing to enforceable undertakings or other settlement mechanisms, and, consequently, more instances of alleged misconduct needing to be resolved in the courts. Where penalties are imposed, it is likely that the figures will be significantly higher than they have been to date.
adequate cross-functional resources, expertise and personnel to help manage enforcement risk.
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See Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018.
See Chapter 8, Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
See ASIC media release 18-284MR dated 25 September 2018.
See ASIC's submission in response to the Royal Commission's Interim Report; in particular, paragraph 25.
See Draft Transcript of Day 64, 23 November 2018, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, page 6953.
Public hearing of the Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, 19 October 2018.
See APRA's submission in response to the Royal Commission's Interim Report.
See Lewis Panther, FINSIA, APRA's evolution towards taking (enforcement) action, 15 November 2018.
See our Focus: ASIC's sanctions and powers to be strengthened and media release dated 26 September 2018 from the Treasurer of the Commonwealth of Australia.
See media release dated 7 August 2018 from the Minister for Revenue and Financial Services, Commonwealth of Australia.
See media releases dated 16 November 2018 from the Treasurer of the Commonwealth of Australia and the Attorney-General for the Commonwealth of Australia.
Under the Australian Prudential Regulation Authority Act 1998 (Cth), APRA members are appointed by the Governor-General for terms of up to five years, and are responsible and accountable for APRA's operation and performance.
Section 39B(1A)(c) Judiciary Act 1903 (Cth) and s1338B Corporations Act.
See Chapter 8, Section 2.2, Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.