Keynote address at AICD Fellows Victorian Division Event

Keynote address by John Price, Commissioner, ASIC at the Australian Institute of Company Directors Fellows Victorian Division Event (Melbourne, Australia), 3 October 2019

Why not litigate?

ASIC’s adoption of the Why not Litigate? approach has generated far more discussion, including misreporting, than I had ever contemplated it might.

I do not see the controversy. That we should frame questions to ask ourselves is an entirely appropriate and logical discipline. It is in the style of Socratic questioning – Socrates having believed that 'the disciplined practice of thoughtful questioning enables the scholar to examine ideas and be able to determine the validity of those ideas'. 

And this is exactly what the Why not Litigate? question is. It is a procedural discipline that ASIC has adopted for ourselves to ensure that we ask and answer this question. It is not a ‘litigate first’ or ‘litigate everything’ strategy. This would not be appropriate from a discretion perspective nor practical from a resource perspective.

Why not litigate? means that once:

  • ASIC is satisfied breaches of the law are more likely than not and
  • the facts of the case show pursuing the matter would be in the public interest,
  • then we will actively ask ourselves: why not litigate this matter?

In fact, we are not alone in framing questions to ask of ourselves. It is a discipline that the Enforcement Division of the U.S. Securities and Exchange Commission also employs. They ask themselves:

  • Are we deterring future harm by bringing meaningful cases that send clear and important messages to market participants?
  • Are we protecting investors and markets by holding individuals accountable for wrongdoing and removing bad actors from the securities markets?
  • Are we stripping wrongdoers of their ill-gotten gains and returning money to victims?
  • Are we acting quickly to stop frauds, prevent future losses, and return ill-gotten gains to harmed investors?

They refer to these four questions as ‘measuring sticks’ which they use both to guide their future efforts, and to assess their performance.   Let me now take you through how we arrived at the ‘Why Not Litigate?’ approach. In the Royal Commission Interim Report delivered in September last year Commissioner Hayne was critical of ASIC’s approach to enforcement. He highlighted that ASIC had, in his view, the wrong starting point:

when deciding what to do in response to misconduct, ASIC’s starting point appears to have been: How can this be resolved by agreement?[1]

Commissioner Hayne’s view was as follows:

This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed. Penalties are prescribed for failure to obey the law because society expects and requires obedience to the law.[2]

While we did not accept that an approach of 'how can this be resolved by agreement' was the starting point we used, we certainly agree that this is not an appropriate starting point for a conduct regulator such as ASIC.

In our submission to the interim report we said:

ASIC acknowledges that for larger financial institutions it should deploy enforcement tools towards the apex of the enforcement pyramid more frequently, particularly criminal and civil court actions. Strategic regulation can only work where the regulator evidences a clear willingness to employ severe sanctions to punish those who commit serious or repeated violations. 

In October 2018 we adopted the ‘Why not litigate?’ enforcement approach and committed to that approach going forward. 

Of the 3 limbs that I mentioned, the first, as to whether ASIC is satisfied of breaches of the law, is perhaps the most straight forward. I therefore will not dwell on it today.

I mentioned earlier the question of the facts of the case and whether pursuing the matter would be in the public interest. We are funded with public money. And litigation is costly. But this issue goes to more than just responsible and effective use of our budget. In grappling with the question of what is or is not in the public interest, the task we face is, I believe, akin to a prosecutorial office.

It may be informative therefore to consider how the Commonwealth Director of Public Prosecutions (CDPP) weighs their consideration of whether the public interest requires prosecution. The CDPP has a prosecution policy containing a non-exhaustive list of factors which may arise for consideration. Albeit non-exhaustive, the list is more than 20 items long. Some of the factors include:

  • Whether the offence is serious or trivial,
  • Any mitigating or aggravating circumstances,
  • The youth, age, intelligence, physical health, mental health or special vulnerability of the alleged offender, witness or victim,
  • The alleged offender’s antecedents and background,
  • The passage of time since the alleged offence,
  • The availability and efficacy of any alternatives to prosecution,
  • The need to give effect to regulatory or punitive imperatives, and
  • The likely outcome in the event of a finding of guilt.

It goes without saying, but I will say it nonetheless, in making decisions about whether to litigate and then in the conduct of such litigation, we will of course meet our model litigant obligations. 

And that brings me to the final question of ‘why not litigate’? When we ask, ‘Why not litigate?’, we need to also ask and answer some subsidiary questions including:

  • Whether to pursue criminal or civil action, and
  • Whether any action is against the corporation or individuals or both.

On the first of those questions – criminal vs civil – what we decide will again depend on the facts and circumstances of each matter and will be heavily influenced by the evidence that is available to establish those facts.

If we believe we have gathered sufficient evidence to support the view that a criminal offence has been committed and that the circumstances of the matter warrant a criminal prosecution, we refer the matter to the CDPP – except in the case of some minor regulatory offences which we are authorised to prosecute on our own behalf.

ASIC will pursue criminal action instead of civil action where it considers the public interest requires a criminal prosecution.  This will involve balancing a number of factors.  A key consideration will be whether the nature, severity, impact and prevalence of the conduct is such that it requires the level of deterrence or moral opprobrium that would result from a criminal action.  

On the other hand, without being exhaustive, some factors that suggest a matter might not require a criminal prosecution include where:

  1. Any available civil penalty action is likely to result in a stronger deterrent impact and more effectively encompasses the misconduct of concern than the available criminal action. This may be particularly relevant where the offender is a corporate entity;
  2. The effective and efficient administration of justice strongly favours the civil penalty action be pursued instead of the criminal action. 

On the question of pursuing the corporation or the individual, allow me to share with you the philosophical underpinning to this question.

A company is an artificial legal entity. As noted somewhat caustically by the UK politician Edward Thurlow in the 1800’s, ‘Corporations have neither bodies to be punished, nor souls to be condemned’.

So how is effective deterrence achieved where the directors and officers of a corporation are insulated from the impact of any fines or behavioural requirements imposed upon companies that are found to have contravened the law?

The evidence to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry raised in some cases the spectre of a ‘cost of doing business’ attitude towards financial penalties and enforceable undertakings imposed on companies. Such an attitude cannot be tolerated, and ASIC’s enforcement approach needs to realign any such thoughts. It follows, that when appropriate, proceeding against both the corporation and the individual corporate officers responsible for the contravening actions of the company should be in our thoughts.

Of course, large corporations deriving substantial profits in the financial services sector must be held to account for civil and criminal breaches of the law. The reputational risks to all corporations (and to those who aspire to be appointed directors of them) must be real and significant to compel cultural change within those parts of corporate Australia where compliance with the law has been less than optimal, to say the least.

The obtaining of judgments and the imposition of penalties against companies reinforces the message that complying with corporation’s legislation is not a choice, but a legal obligation.

Successful individuals must be encouraged to eschew association with a culture which is cavalier about compliance with the law. Boards which fail to drive a culture of compliance with the law may well find their directors subjected to reputational damage. Significant reputational harm is adverse to shareholder value. Loss of shareholder value in turn drives the directors to search for a sustainable future for their companies. Shareholders, and potential shareholders, well understand that a sustainable future cannot be achieved if the corporate culture is one of ignoring the law.

Let me now turn to some reflections on the external regulatory architecture, and the implications for ASIC’s approach to court-based enforcement.

Decisions in the past about what enforcement action to pursue have been, in part, informed by limitations placed on the regulator by the law. Principally what I mean here is penalties.

There has been an expansion and strengthening of penalties with the passage of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 in March of this year.

For contraventions occurring from 13 March 2019:

  • Civil penalties now apply to certain misconduct that before had no penalty
  • Penalties have been strengthened, including by:
    • Increasing maximum prison penalties for the most serious offences to 15 years; and
    • Increasing the maximum civil penalties to $1.05M for individuals and $525M for companies.
  • There is also an extended infringement notice regime, and the availability of disgorgement remedies.

Before this reform no penalties were available to be pursued for breaches of some of the cornerstone obligations owed by Australian Financial Services Licensees including of banks to their customers, the citizens of Australia. Many of the referrals by the Royal Commission to ASIC related to these breaches and in particular, the obligation to act efficiently, honestly and fairly. Further, many of matters that were subject to ASIC pursuing court enforceable undertakings and remediation programs in past years also related to these breaches. Breaches that until recently had no penalty.

Some of the other misconduct that civil penalties now apply to include failure to report breaches to ASIC, carrying on a financial services business without a licence, and breaches of the duty of utmost good faith under the Insurance Contracts Act.

ASIC has advocated over an extended period about the need for penalties in the legislation we administer to be substantial enough to represent a credible deterrent and to meet community expectations as to the seriousness of the misconduct. We certainly welcome these recent changes.

Turning then to the other players upon whom we rely when we bring court-based enforcement: the Court and in the case of criminal action, the CDPP. Some recent announcements are important here.

In March, the Treasurer, The Honourable Josh Frydenberg, announced the expansion of the Federal Court’s jurisdiction to include corporate crime. The announcement stated, ‘the expansion and funding will ensure that those who engage in financial sector criminal misconduct are prosecuted and face appropriate punishment for their actions in a timely manner’.

The announcement referred to the expectation of increased enforcement activity and specifically more criminal prosecutions arising from the Royal Commission referrals and ASIC’s shift to a ‘Why not litigate’ approach.

Additional funding has also been provided to the Federal Court to populate a panel of judges with regulatory expertise to support civil cases.

And the CDPP has received $41.6 million to prosecute briefs from ASIC.

All of this reveals an intention – in so far as you can ascertain it from funding decisions – to create an environment in which ASIC can pursue more court-based enforcement. In light of this, reasons why we may have answered the ‘Why not litigate?’ question in the negative on some previous occasions, diminish.

Another component of our new enforcement approach is our Office of Enforcement.

The Office of Enforcement is responsible to the Commission for all of ASIC’s enforcement activities and policies. The objective of the Office is to strengthen ASIC’s enforcement culture and effectiveness and implement a single enforcement strategy for ASIC.

It centralises decision-making processes and ensures the consistent adoption of our Why Not Litigate approach. It will also ensure the functional separation of ASIC’s enforcement teams as much as possible from non-enforcement related contact with regulated entities. This responds also to a recommendation made by Commissioner Hayne.

So, we are focused on increasing and accelerating court-based enforcement outcomes, and we are looking to use the full extent of our new powers and penalties. 

In fact, between July 2018 and June 2019:

  • there has been a 20% increase in the number of ASIC enforcement investigations,
  • a 51% increase in enforcement investigations involving Australia’s largest financial institutions (or their officers or subsidiary companies), and
  • a 216% increase in wealth management investigations.

Some final points before I finish. It has been put to ASIC by a number of parties that the changed environment we all find ourselves will necessarily mean companies are far less likely to cooperate with ASIC then previously and that the focus on enforcement has been too pronounced.

A few brief comments on each of these concerns. Firstly, a cooperative approach to dealings with ASIC may benefit a person or entity in many ways even in an ‘why not litigate’ world.

For example:

  • early notification of misconduct or a cooperative approach during an investigation will often be relevant to our consideration of which type of action to pursue and what remedy or combination of remedies to seek; and
  • in any proceedings commenced by ASIC we will give due credit for any cooperation we have received from the person or entity against whom the proceedings are brought.

More fundamental however is that, in my view, good regulatory relationships are valued both by companies and the market. The point here, of course, is that the question of cooperating with regulators is not simply a legal one and indeed I would argue is not even primarily a legal one in today’s environment. And we are well beyond the days when merely fulfilling legal obligations and nothing more is seen as cooperation.

On the second point, to reiterate, our adoption of the Why not litigate stance does not suggest that we will take every matter to court as the default option. Whilst a lot of the media coverage of ASIC’s remit is focussed on enforcement, the reality is that we use a variety of regulatory tools, often in a multi-dimensional way, to achieve our goal – and that is to create a fair, strong and efficient financial system for all Australians.

Take for example, ASIC’s announcement yesterday of our Corporate Governance Taskforce report looking at non-financial risk and our work in having ASIC staff on the ground more regularly inside large financial institutions. This work shows our commitment to enhanced supervision practices. It enables us to heighten engagement, assessment and feedback loops between ASIC and the people we regulate and it also helps deal with issues in a proactive way, not just to litigate after things have gone wrong.

But in an environment where there have been significant failings over a prolonged period in regulated entities, it should be very unsurprising that there is a focus on a more robust response to deal with the issues at hand. To quote Commissioner Hayne ‘The arrangements of the past have allowed conduct of the kinds and extent described here and in the Interim Report of the Commission. The damage done by that conduct to individuals and to the overall health and reputation of the financial services industry has been large. Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened.

For ASIC, that decision involves enhanced supervision and enforcement.

For the corporate Australia, in deciding what next, I can do no better than again refer to Financial Services Royal Commission report that suggested very close attention be given to culture, governance and remuneration practices. And on that front, I commend the AICD for its recent Forward Governance Agenda.

Thank you and I look forward to any questions.


 

[1] Interim Report, p 277.

[2] Interim Report, p 277.

Last updated: 04/10/2019 12:00