What to expect from ASIC enforcement in the "post-Hayne world"

What you need to know

• Australian Securities & Investments Commission (ASIC) is likely to focus heavily on litigation where civil penalty provisions are involved, including cases with uncertain prospects of success.
• Enforceable undertakings would need to give a "more effective regulatory outcome" than litigation.
• Infringement notices are likely to be focussed on "lax administrative conduct", but there may be more activity in that space.
• ASIC has released information about key principles which will guide its approach (discussed below).

The criticisms of ASIC that are likely to shape its approach

ASIC was heavily criticised in the Royal Commission Final Report, which considered:

• the law was too often not enforced at all, or not enforced effectively;
• ASIC has an "ineffective enforcement culture";
• ASIC has a "deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of, and punishment for, wrongdoing".

The Commissioner has recommended that ASIC be closely monitored over the coming years, and consideration be given to setting up a specialist enforcement agency if ASIC is not sufficiently enforcing the law.

Clearly, ASIC will be looking for a strong report card as that monitoring progresses.

The infamous "Why not litigate?" question

One of the best known enforcement themes coming out of the Royal Commission is the Commissioner's view – which ASIC has publicly accepted – that the critical question for ASIC to ask itself is "why not litigate"?

This is against the background of the Commissioner's view that so far, ASIC's starting point appears to have been to ask how matters can be resolved by agreement. The Commissioner's view was that "this cannot be the starting point for a regulator".

But how does ASIC answer the "why not litigate" question?

The Report recognises that the question "calls for skill and judgment", but doesn't give a lot of direct practical guidance.

It does, however, place a lot of emphasis on the value of going to court. The report says:

• the starting point is that the law is to be obeyed and enforced, and that adequate deterrence of misconduct requires public denunciation and punishment;
• serious breaches of the law by large entities call for the highest level of regulatory response;
• breaches of offence and civil penalty provisions are not to be dismissed as "just a breach of those laws"; and
• if ASIC has reasonable prospects of proving a contravention of the law, its starting point must be that "the consequences of contravention should be determined by a court".

ASIC has itself begun to grapple with these issues, having just announced:

• it is setting up a separate "Office of Enforcement" that will be responsible for investigations and enforcement (and, it seems, provide the skill and judgment required to answer the "why not litigate" question);
• the Office of Enforcement's guiding principles will focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation;
• it will weigh up any public interest in pursuing a non-court negotiated outcome with the "clear benefits" of a judgment and prison sentence, civil penalty or other court based outcome, and it will only pursue a negotiated outcome where the objective assessment weighs in favour of the negotiated outcome;
• there will be a focus on both corporate and individual accountability, particularly at executive and board level.

At a more practical level, ASIC's approach to the "why not litigate" question is also likely to be informed by what the Commissioner says about the key alternatives: infringement notices and enforceable undertakings.

Infringement notices for "lax administration" but not much else

The Commissioner considered that infringement notices have been "convenient and expeditions", but "achieved neither punishment nor deterrence". He was also concerned that they can encourage entities to treat penalties as a cost of doing business.

The Final Report considers ASIC policy should reflect that:

• Infringement notices are a useful way to deal with lax administrative conduct such as failing to lodge a return on time.
• But they will rarely if ever be appropriate beyond that, particularly where the matter involves provisions that require "evaluative judgment" (such as prohibitions on false and misleading conduct), or where a large corporation is involved.

It will be interesting to see if, in addition to less use of infringement for more "serious" alleged breaches, there is more use of them to punish "lax administration".

Enforceable undertakings where they achieve "a more effective regulatory outcome"

The Final Report appears to consider enforceable undertakings to be appropriate where they are a "more effective regulatory outcome".

But the Commissioner did not consider their use to have been particularly effective to date.

In particular, the Commissioner questioned the deterrent effect of enforceable undertakings where the entity fails to acknowledge what it did was wrong, and where there is no judicial determination to confirm to the market that the conduct was wrong.

The report also considered that, moving forward, the various factors to be considered would "ordinarily point firmly away from accepting" an enforceable undertaking.

In particular, the report referred to:

• the Commissioner's view that ASIC did not need to choose between ensuring remediation through an enforceable undertaking and taking proceedings – considering that ASIC starting proceedings would likely encourage remediation so that it could be taken into account on penalty; and
• proposed legislation (which passed both the Senate and the House of Representatives this week) that, once it receives the Royal Assent gives ASIC other means of achieving what enforceable undertakings often have, by giving ASIC a disgorgement remedy in civil penalty proceedings, and a directions power that extends to requiring remediation.

The report concluded that if an enforceable undertaking is a more effective regulatory outcome "despite all these considerations", then ASIC should generally only accept one in connection with a civil penalty provision where the entity acknowledges it has breached specific provisions.

ASIC should still run cases with uncertain prospects - but just how low is the bar?

In effect, the Commissioner's report tells ASIC that "its ok to lose cases sometimes" given its role.

It says that ASIC does not always need "reasonable prospects of success", but rather "reasonable grounds" to start proceedings. The report talks about public interest reasons aside from prospects that feed into this, including where the issue is systemic or there may be benefit in clarifying the law.

But just how low is the bar?

The term "reasonable prospects" is also used in the civil context, where litigants need at least "reasonable prospects" before starting proceedings. The courts have referred to this as being "more than a fanciful prospect of success". It seems unlikely that the Commissioner is suggesting cases below this level should be brought – but rather that it is ok for ASIC to bring proceedings even where it is not certain of winning.

Targeted and precise litigation is the answer to the cost and resourcing issues associated with litigation

Litigation is expensive and requires resources. There would seem to be a limit on what ASIC can do if it moves towards a more "litigation heavy" approach.

However, the Commissioner talks about:

• the costs of not litigating – including that other options do not guarantee a faster resolution, and the cost to the community of not adequately deterring misconduct; and
• how the time and cost of a case is affected by the precision of it.

The Commissioner considers that at least in some cases, insufficient attention may have been given to basic questions that should be driving the litigation, such as:

• what conduct is alleged to contravene what law in what respects?
• what are the critical facts?
• how will they be proved?

The Commissioner appears to consider the answer is more focus on "precise case formulation and preparation" rather than non-litigation options. He notes that "if the work is focussed", the "apparently overwhelming mass" of work is "rendered intelligible and manageable".

Authors:  Ian Bolster, Partner and Tim West, Senior Associate.