Radical shake up of penalties for corporate and financial services misconduct
Bigger sticks and a platform for ASIC's new "why not litigate" enforcement stance
What you need to know
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The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 passed both Houses this week. Once it receives the Royal Assent (likely in the near future), the Bill will significantly increase penalties and prison terms for financial sector and corporate misconduct. For example, for large AFSL holders, the maximum civil penalty will be $525 million per contravention (up from $1 million), and for criminal provisions 10% of annual turnover, uncapped. This will raise new continuous disclosure challenges for listed licensees, and make the potential financial consequences of non-compliance for all licensees of a whole new order of magnitude.
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In line with the ASIC Enforcement Taskforce recommendations from December 2017, the Bill seeks to modernise and significantly expand the civil penalty regime by making a wider range of contraventions subject to civil penalties (including notably AFSLs' "efficiently, honestly, fairly" obligations under s912A(1) of the Corporations Act).
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Breach reporting failures will also be much more likely to be subject to Court based outcomes, given non-compliance can now be dealt with by a civil penalty, whereas previously only a prosecution was available.
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A renewed focus on breach reporting is made all the more pressing by a new provision which makes it an ongoing obligation to fail to comply with requirements such as the obligation to breach report significant breaches. As a result, for example, every day that a licensee fails to comply with its breach reporting obligations, there is a separate contravention, something made all the more significant by virtue of the greatly increased penalties available (up to $525 million for each contravention for large licensees).
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Under the new legislation, Courts will also be given a discretion to make "relinquishment orders", with any financial benefit gained from conduct that contravened a civil penalty regime being relinquished.
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ASIC can be expected to make use of the enhanced enforcement toolkit which this legislation provides in line with its formally adopted "why not litigate?" enforcement stance.
What are the main changes?
Some of the key changes are summarised in the table below.
| Increased civil penalties |
The maximum civil penalties will significantly increase from its current maximum ($200,000 for individuals and $1m for companies). Under the reform, the financial penalties for individuals will be the greater of:
For bodies corporate, the financial penalty will be the greater of:
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| Expanding the civil penalty regime |
The Bill significantly expands the number of provisions which are subject to the civil penalty regime, including a number of additional provisions in the Corporations Act, as well as a range of other provisions in the Credit Act, Credit Code and the Insurance Contracts Act. Perhaps most significantly, this includes:
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| Increased criminal penalties |
For a number of offences under the Corporations Act, ASIC Act and the Credit Act, the maximum imprisonment term will be raised. For the most serious offences under the Corporations Act (eg false trading and market rigging and making false and misleading statements under sections 1041B and 1041E of the Corporations Act), the maximum term has been increased from 5 to 15 years (up from the originally proposed 10 years). Fines for offences are also increased and a new formula to calculate financial penalties is introduced with the maximum financial penalty calculated by reference to the maximum term of imprisonment for the relevant offence. For offences where the maximum term of imprisonment is 10 years or more (such as those referred to above), the maximum financial penalties for individuals will be the greater of:
For bodies corporate, the maximum fine will be the greater of:
For strict liability offences (such as failing to provide notice of name and address of directors and secretaries to ASIC), imprisonment is removed as punishment, with financial penalties set to be increased in its place. |
| Relinquishment and compensation orders |
Relinquishment orders, also known as disgorgement remedies, were previously only available in criminal matters under the Proceeds of Crime Act 2002. The Bill makes these available in civil penalty proceedings brought by ASIC under the Corporations Act, the Credit Act and ASIC Act. The Bill also introduces provisions to ensure that where civil penalty provisions are breached, courts give preference to making a compensation order where a defendant does not have sufficient resources to pay a pecuniary penalty and a relinquishment order. |
| Expanded use of infringement notices |
Infringement notices (or "speeding tickets") can currently be imposed by ASIC for contraventions of the unconscionable conduct and consumer protection provisions of the ASIC Act and strict liability offences and certain civil penalty provisions under the Credit Act. It is proposed that the use of this regulatory mechanism be extended to a range of offences in the Corporations Act (all strict and absolute liability offences, all civil penalty provisions) as well now being available for contraventions of the Credit Act, the Credit Code and the Insurance Contracts Act. Given the Hayne Royal Commission's suggestions that infringement notices only be used in limited cases involving administrative oversight, however, it is unclear how much these provisions will be used. |
| New dishonesty test | Previously "dishonesty" for the purposes of offences in the Corporations Act has been inconsistently defined. A new, objective definition of dishonesty will be introduced by the Bill which will apply across all dishonesty offences in the Corporations Act. The new definition incorporates the single limb test preferred by the High Court in Peters v R (1998) CLR 493, which sets out that conduct is dishonest if it is dishonest according to the standards of ordinary people. There will no longer be any requirement that the person involved in the conduct knew it was dishonest according to the standards of ordinary people. In other words, it will be possible to engage in dishonest conduct without an actual awareness that the conduct was dishonest. |
A platform for a "why not litigate"? enforcement stance
As explored in more detail in our Royal Commission "Insight Series" article, ASIC has formally adopted a "why not litigate?" enforcement stance and plans this year to establish a separate Office of Enforcement within ASIC.
This Bill provides ASIC with a platform from which to implement this new enforcement stance more broadly and with greater effect. Indeed, ASIC Deputy Chair, Daniel Crennan QC, recently noted ASIC will now be in a stronger position to pursue harsh civil penalties and criminal sanctions against those who have breached the corporate laws of Australia.
One area to keep a close eye on will be how ASIC approaches enforcement outcomes regarding licensees' section 912A obligations (including to do all things necessary to ensure the financial services are provided efficiently, honestly and fairly), and in particular the penalties ASIC seeks given that it will now be a civil penalty provision and subject to a maximum financial penalty of $525m per contravention. Given this significant change, this "cornerstone" AFSL obligation clearly now takes on a new found prominence in the risk and compliance landscape and in enforcement outcomes regarding financial services.
Breach reporting
Another area to closely watch is how ASIC approaches enforcement of breach reporting obligations. This is an especially pressing issue for licensees given that this part of the legislation will commence the day after receiving the Royal Assent and will apply to offences or contraventions occurring after the legislation has commenced (it will not apply retrospectively).
Not only is breach reporting now a civil penalty provision and therefore much more likely to be subject to Court based outcomes, but a new section of the Corporations Act (s 1317QA) dealing with continuing contraventions of civil penalty provisions has been introduced. In the context of breach reporting (and other provisions requiring something to be done by a particular time), this makes it an ongoing obligation to report significant breaches. What's more, each day that a licensee fails to comply with its breach reporting obligations, gives rise to a separate contravention.
It means that the scope for maximum penalties to multiply to very high levels is considerable. We would expect that, in calculating the civil penalties to any such contraventions, the Court would apply the applicable general principles under the current case law, such as the course of conduct and totality principles, in fixing the applicable civil penalty, to avoid inappropriate double punishment for the same conduct.
Nevertheless, penalties could easily be in the tens of millions for smaller licensees and the hundreds of millions for larger institutions. Given those very large sums of money, this is a significant development for licensees and fundamentally shifts the risk equation in relation to breach reporting.
Authors: Andrew Carter, Partner; Jonathan Gordon, Partner; Tim West, Senior Associate; and Anna Gruen, Lawyer.
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