Kenneth Hayne, the head of the Australian Financial Services Royal Commission, has issued an interim report to the public which outlines the shortcomings of the country's regulatory regime in stark terms. The Australian Securities and Investments Commission, Australia's beleaguered conduct regulator, is putting a brave face on the situation and asking for more powers and money.

The Royal Commission's interim report is damning. On the subject of the regulator's usefulness in recent cases of wrongdoing, including the epic volume of wrongdoing that the commission itself has uncovered this year, it says: "When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court. Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn-out remediation programme and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct. Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment,’ but the amount was far less than the penalty that ASIC could properly have asked a court to impose."

As often reported in our web-pages, ASIC imposes 'enforceable undertakings' on recalcitrant firms in a manoeuvre reminiscent of US deferred prosecution agreements.

Underwhelming regulation

Over the ten years before 1 June this year, the report discloses, the 'infringement notices' that ASIC has served on the major banks have amounted to less than A$1.3 million. By contrast, in one year (the one ending 30 June 2017) one bank, Commonwealth Bank of Australia, declared a profit that was about 7,000 times greater – A$9.93 billion after tax – and the total amount that CBA had paid out in 'remediation' (restitution) to customers was many hundreds of millions of dollars. The report draws the conclusion that infringement notices are too lenient by far.

ASIC has, over the years, expressed much concern about the quality of financial advice in Australia. Some time ago it performed a review of sample customer files as part of the project that led to its 'report 562,' which was full of damning evidence about failures among advisors to comply with the 'best interests' duty imposed on them by s961B Corporations Act.

The Royal Commission, however, has found the regulator's attempts to take action in this area somewhat underwhelming: "In the previous 10 years, ASIC had commenced six civil penalty proceedings against Australian financial services licensees, of which four were commenced in 2018. It had undertaken one criminal action against a licensee, preferring to take criminal proceedings against individuals within an entity. In that period, ASIC took action three times against a licensee for breach of the general obligations in section 912A. In one case, it removed the licensee’s licence. The two others resulted in suspensions...ASIC ‘rarely if ever’ uses its statutory power to disclose information about an advisor to a licensee and releases little information about the circumstances of individual banning orders due to what it sees as procedural fairness concerns."

Joshua Frydenberg, the Treasurer of Australia, joined in the chorus of criticism at a recent press conference, blaming ASIC's culture (rather than an absence of powers or funding) for its tendency to overlook wrongdoing: "This is clearly unacceptable and cannot continue. The findings here go to a culture of negotiation rather litigation. Too often, the regulator would seek a negotiated outcome rather than take the next step to litigate and make them face court. Perpetrators got off too lightly."

ASIC - a source of government revenue rather than of regulation?

Criticism of a worrying kind has come from another quarter. One of ASIC's former heads of strategic management has reportedly made a submission to the Royal Commission that says: “ASIC’s appropriations over the past decade have been less than half of the amount that it has collected on behalf of the Treasury. In that period, ASIC has collected revenues for the Government...that exceed its appropriations by more than A$4 billion. If ASIC has insufficient funding to conduct the level of regulation that now seems to be expected of it, while the Treasury reaps billions in profits from ASIC’s operations, then the responsibility for that insufficiency lies not with ASIC but with ASIC’s political masters.”

The former manager reportedly argues that ASIC's company licensing operation, for which it allegedly charges far more than needs be, is a particularly profitable source of revenue for the Government's general coffers. The Australian press has therefore denounced ASIC as a 'cash cow' for the Government, imposing fees needlessly and passing most of the proceeds upwards. Frydenberg has promised to look into the matter.

The absent policeman

The regulator (although the report does not mention it) seems to be slow in implementing its plan to embed regulators at all four of Australia's largest banks, having only begun to do so at Commonwealth Bank of Australia in the final three days of last month. This is in spite of the Australian Government's over-dramatic announcement that it expected to have ASIC staff at all four banks by the end of August.

ASIC has promised to speed its enforcement process up and increase its capacity to act against serious misconduct by using more external expertise and resources, while also doing more to supervise financiers. It wants to take more civil and criminal court action against larger financial institutions and, in one extraordinary passage of its response to the interim report, it says that it wants at the outset of every issue to ask itself the question: ‘why not litigate?’ It claims that the point of this aggressive strategy is to punish wrongdoers but it also thinks that litigation might be useful "to clarify the meaning and effect of the laws that ASIC administers, particularly to support interpretations that may have a significant impact on deterring misconduct."

The best defence is attack

To achieve this, the regulator believes that it needs more income. ASIC argues that it is under-resourced when compared with 'conduct' regulators in other jurisdictions, citing Hong Kong as an example. If the registry function is excluded, in 2017–18 ASIC’s total budgeted resources were A$336 million. The comparable regulators in Hong Kong together had estimated annual total operating expenses of A$505 million and staff of 2,203 for conduct regulation in 2016–17. Australia, meanwhile, has close to three times the number of financial services and insurance industry employees per conduct regulator employee compared with Hong Kong.

Meanwhile, the regulator appears to be stepping up its general rate of activity, the better to dispel widespread accusations that, in the words of the Citizens Electoral Council of Australia, "ASIC has fallen victim to a textbook case of “regulatory capture” and believes its real job is to shield the banks from the consequences of their misdeeds." It has called for a blanket ban on commissions on all general insurance products. It is planning to impose more onerous competency rules for advice licensees. It is asking the Government to let it take on an expanded role in the pensions/superannuation sector. (The Royal Commission has criticised the Australian Prudential Regulation Authority for being reluctant to take enforcement action against misconduct in pension funds.) One attempt to make a show of frenzied activity appears to have backfired, however: this month a federal court judge denounced ASIC's argument that Westpac should pay a fine of A$58 million because (as that judge had found in the summer) it had acted unconscionably when trying to rig an interest rate as "frankly ridiculous." Justice Jonathan Beach detected gaping holes in ASIC's case for such a high penalty, stating that it had never made the necessary case for such a fine and that its argument was "wholly artificial" and "just playing with language."

Requests for new powers abound in ASIC's response to the interim report. It writes of extending the application of the Banking Executive Accountability Regime reforms (BEAR, currently administered by APRA) to 'conduct' in most, if not all, financial services and credit businesses. It also wants to obtain the power, cast in similar terms to APRA’s rule-making power, to issue standards in relation to prudential matters. ASIC is envious of the British Financial Conduct Authority's broad statutory power to make such rules as appear necessary or expedient for the purpose of advancing one or more of its operational objectives and is asking for the same. This is a brave request, coming from a regulator whose reputation has been impaired.

The regulator also wants the Government to extend "design and distribution obligations" to credit products it regulates under the National Consumer Credit Protection Act 2009; or to products regulated only under the ASIC Act. It wants the Government to expressly permit it, when applying the product intervention power, to "require training of staff focused on poor practices in relation to the particular product involved." Australia follows a "twin peaks" regulatory model, with ASIC looking after 'conduct' (i.e. good conduct in markets and the protection of investors from sharp practice) and APRA looking after prudential matters, but ASIC seems keen to blur the line slightly.