The Evolution of ASICs Enforcement Approach
19 October 2021
What you need to know
- Comments made by the recently appointed Chair and Deputy Chair of ASIC, Joe Longo and Sarah Court (Ms Court joining Karen Chester as a Deputy Chair), and ASIC's recently published Statement of Intent, Corporate Plan for 2021-2025 and Annual Report 2020-2021 suggest that ASIC's enforcement approach has shifted away from the 'why not litigate?' regime. This coincides with the finalisation of matters arising from the Banking Royal Commission.
- While litigation will still play an important role in enforcement, both the new Chair and Deputy Chair have expressed enthusiasm for also using other tools in ASIC's enforcement toolbox when appropriate. That includes enforceable undertakings, which fell out of favour after the Banking Royal Commission.
- ASIC's new Chair has foreshadowed that we should expect an active, targeted, proportionate approach to enforcement, and that ASIC's commitment to dealing with serious and egregious misconduct that causes consumer harm will continue.
Evolution of ASIC's Enforcement Approach
From 'negotiating outcomes' to 'why not litigate?' to 'express investigations', ASIC's enforcement approach has evolved significantly over the past few years. This update examines how ASIC's approach to enforcement has changed in response to the Banking Royal Commission and the COVID-19 pandemic, and what the recent appointment of ASIC's new Chair and Deputy Chair, Joe Longo and Sarah Court, might mean for future enforcement activity.
Pre-Royal Commission: Negotiating outcomes
Prior to the Banking Royal Commission, ASIC's approach to enforcement appeared to be less focused on pursuing litigation in response to misconduct. Shortly after becoming ASIC Chair in 2018, James Shipton noted that 'enforcement is intrusive, adversarial and expensive', highlighted how 'in ASIC's experience securing compensation for consumers is usually more efficiently obtained without going to court' and stressed that the regulator should 'actively consider and assess all the regulatory tools available'. 1
ASIC's enforcement approach was criticised by the Banking Royal Commission as overly cooperative and conciliatory towards the bodies that ASIC was designed to regulate. Commissioner Kenneth Hayne described ASIC's approach as reflective of a 'deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of, and punishment for, wrongdoing'. 2 When faced with misconduct, Mr Hayne noted that 'ASIC's starting point appears to have been: How can this be resolved by agreement?', and declared that 'this cannot be the starting point for a conduct regulator'. 3
Post-Royal Commission: Why not litigate?
In response to these criticisms, ASIC adopted a more assertive approach to enforcement. Dubbed the 'why not litigate?' approach, reflecting Commissioner Hayne's view that litigation must be ASIC's first consideration when faced with misconduct, 4 this approach saw court proceedings quickly become ASIC's go to method of enforcement. There was also a sharp decline in the use of enforceable undertakings. In 2020 alone, ASIC initiated 64 per cent more civil penalty proceedings and 36 per cent more criminal proceedings compared to 2018. 5
The increase in enforcement proceedings was also accompanied by stronger rhetoric from ASIC's leadership. Then Deputy Chair Daniel Crennan QC declared that ASIC's new stance meant that 'we should be feared and we should be taken very seriously', 6 while Chair James Shipton emphasised that ASIC's enforcement work now had 'a core focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation'. 7
ASIC recently produced a table setting out its enforcement results from July 2011 to April 2021 to the Parliamentary Joint Committee on Corporations and Financial Services. The table highlights the practical outcomes of the different enforcement approaches taken pre and post the Banking Royal Commission. By way of illustration, in the financial year 2018-2019, ASIC completed 25 civil proceedings, secured $12.7m in civil penalties, issued 14 infringement notices and secured 10 court enforceable undertakings. In contrast, in the financial year 2020-2021, as at 30 April 2021, ASIC had completed 43 civil proceedings, secured $169m in civil penalties, issued 2 infringement notices and secured 2 court enforceable undertakings. 8
COVID-19 and Express Investigations
The COVID-19 pandemic saw a recalibration of ASIC's enforcement approach and priorities, with the regulator acknowledging that the financial services sector was under 'enormous pressure'. However, ASIC stressed that it would continue to progress enforcement matters arising out of the Banking Royal Commission and other 'high deterrence matters', as well as focusing on enforcement 'against the most egregious misconduct' and time critical investigations. 9
In a speech to industry leaders in November 2020, Deputy Chair Karen Chester reflected on how ASIC had 'stepped in and up to help business and consumers', pausing some of its regulatory 'good-to-haves' whilst retaining the 'must-haves'. 10
March 2021 then saw the roll out of ASIC's new 'express investigation' initiative. This was billed as a 'lighter but more impactful' approach to enforcement that would be quicker, more cost-effective and, where possible, based on cooperation. Karen Chester indicated that rather than targeting 'harm-free process breaches', ASIC would now seek to 'maintain a regulatory spirit level' between targeting 'harmful misconduct' and rewarding 'good performers with nudges, not grudges'. However, she also emphasised that the use of express investigations was dependent on a company's regular and consistent engagement with the regulator and that, with a 'one strike and you're out' policy, any failure to cooperate would mean ASIC's investigation still 'forges on', but 'slowly and with greater cost'. 11
Joe Longo and Sarah Court: A New Era of Enforcement?
In April 2021, Federal Treasurer Josh Frydenberg announced the appointment of Joe Longo as ASIC's new Chair, with Sarah Court appointed as a Deputy Chair (Karen Chester also remaining in a Deputy Chair role). 12 Both Mr Longo and Ms Court were appointed for five-year terms, which commenced on 1 June 2021.
In a range of public pronouncements since their appointments (to the Senate Economics Legislation Committee, the Parliamentary Joint Committee on Corporations and Financial Services, the Standing Committee on Economics, and in a range of media interviews), both Joe Longo and Sarah Court have signalled another adjustment in ASIC's approach to enforcement. That has coincided with the finalisation of matters arising from the Banking Royal Commission and the implementation of law reform following the recommendations of that Commission. Notably:
- When asked to describe ASIC's enforcement approach under his leadership and whether 'why not litigate' continued to be relevant, Joe Longo told the Parliamentary Joint Committee that 'ASIC will always be an active, credible law enforcement agency' and, while the 'why not litigate?' mantra was a 'very useful approach' to enforcement, 'no particular mantra is ever going to really capture the subtlety or the complexity of what we're talking about.' He then noted that ASIC was not going to be able to investigate everything and had to make choices, reminding the Committee 'that what we're really talking about is active, credible, targeted law enforcement'. 13
- In response to concerns raised about ASIC stepping away from the 'why not litigate' mantra, Joe Longo told the Standing Committee on Economics that ASIC's commitment to enforcement was not going to change, that it would remain an active litigator, and 'the critical question is that we investigate and litigate the right matters, and that we take full advantage of the full range of enforcement and regulatory tools that are available to us under the law'. 14
- Sarah Court has also emphasised that while litigation is and will continue to be an important enforcement tool, it was only one of a number of enforcement tools that ASIC would seek to utilise.
The gist of the various statements by Mr Longo and Ms Court appears to be that ASIC will remain an active litigator and particularly prioritise matters that give rise to significant consumer detriment or hardship or which relate to egregious misconduct, including matters that might undermine confidence in the market. However, there is also a recognition that not every case is a candidate for litigation and that in some circumstances other enforcement tools are more appropriate.
ASIC's recent Statement of Intent, published in response to the Government's Statement of Expectations for ASIC, and its new Corporate Plan for 2021-2025 and Annual Report 2020-2021 support this narrative:
- In its Statement of Intent, which outlines how ASIC will achieve its objectives, carry out its functions and exercise its powers in discharging its responsibilities, ASIC declared 'We will use our full suite of regulatory tools in a targeted and proportionate way, to identify and reduce the risk of misconduct in the markets and sectors we regulate. We will focus our enforcement action on areas of greatest harm, and take an active and targeted approach to enforcement.'
- Joe Longo re-iterated this in his message at the beginning of ASIC's Corporate Plan, which outlines ASIC's regulatory priorities and actions over the next four years. He states that 'ASIC will continue to be a strong and targeted law enforcement agency. We will remain an active litigator against misconduct. We will use our full suite of tools and powers to address wrongdoing. Our enforcement actions will prioritise areas of greatest harm and the protection of vulnerable consumers and investors'.
- The Chair's report in the Annual Report contains similar statements, noting that 'criminal charges, civil cases, enforceable undertakings, product interventions, financial penalties, bannings and licence conditions – are all on the table and will be used to achieve what's right. We will hold individuals and corporations to account and will act quickly and decisively to disrupt, deter and punish misconduct'.
In recent media interviews following the release of ASIC's Statement of Intent and Corporate Plan, both Joe Longo and Sarah Court have highlighted they are litigators by trade and that, whilst the 'why not litigate' mantra may no longer be relevant, ASIC will continue to litigate. They have also continued to promote the message that ASIC will take an active, targeted and proportionate enforcement approach, as well as foreshadowing speedier investigations, quick deterrent actions, more enforceable undertakings, and a focus on system failures and systemic compliance issues in financial institutions.
The appointment of Joe Longo and Sarah Court may therefore mark an evolution, rather than a revolution, in ASIC's enforcement approach, as it once again tries to strike the right balance between litigation and alternative means of resolving enforcement concerns, and reacquaints itself with some of the other tools in its enforcement toolbox. However, as ASIC moves away from a universal application of its 'why not litigate' approach, it is important to remember that the recent legislative changes which considerably increased civil and criminal penalties and expanded the civil penalty regime will mean that enforcement will continue to be a much bigger issue for businesses than it has been historically, and that when enforcement action is taken by ASIC, the consequences for defendants are likely to be significant.
Authors: Rani John, Partner; Liz Seddon, Counsel; Robert Boag, Graduate; and Beau Arnfield, Graduate.
Endnotes:
3. Ibid, 424.
4. Ibid, 442.
5. ASIC Enforcement Update: July to December 2020 (Report No 688, 16 April 2021) 3.
7. James Shipton, 'ASIC Chair's Introductory Comments' (Speech, ASIC Annual Forum 2019, 16 May 2019).
8. ASIC's Annual Report 2020-2021 contains updated figures for the financial year 2020-21 and reports that ASIC completed 46 civil litigation actions, secured $189.4m in civil penalties, issued 3 infringement notices and accepted 3 court enforceable undertakings during this period.
9. ASIC Interim Corporate Plan 2020-21 (Report, 11 June 2020) 2.
10. Karen Chester, 'Getting on with it' (Speech, AFR Banking and Wealth Summit, 18 November 2020).
