- ASIC’s enforcement priorities for 2023 include greenwashing, targeting the poor design and distribution of financial products, pricing promises in insurance, protecting financially vulnerable consumers from predatory lending practices or high-cost credit, and directors’ duties and governance failures.
- This speech outlines how ASIC is delivering against those priorities.
- General counsel can be pivotal to whether a significant matter is able to be effectively resolved with a regulator, or not.
Check against delivery
Good morning, everyone. It’s a pleasure to be here to speak with you today.
I understand that there will be a number of general counsel, or at least senior legal representatives, in the audience today and that you represent a spectrum of industries and companies of varying sizes and complexity. I suspect, accordingly, you will have different degrees of familiarity with ASIC, and different experiences of interacting with us.
In broad terms, ASIC is the conduct regulator across the financial services industry – that includes banking, insurance, and superannuation. We work alongside the Australian Prudential Regulation Authority (APRA) in financial services, and alongside our fellow conduct regulator, the Australian Competition and Consumer Commission (ACCC), in the broader economy. We were the regulator at the heart of the Financial Services Royal Commission, and we received significant criticism in relation to our enforcement work in Commissioner Hayne’s final report. It is within that context that we now approach enforcement and the remarks I am about to give.
Keeping in mind the range of experience in the room, I have come up with three topics that I thought would be of the most interest and practical assistance to you. These are:
- ASIC’s approach to enforcement
- our enforcement priorities for 2023, and some of our recent work against those issues, and
- some personal reflections on the role of general counsel.
Why do we have enforcement priorities?
For the first time, late last year, ASIC publicly released our enforcement priorities. We did this in part because industry was calling for transparency from us about the key issues that we were going to be focusing on. Communication and transparency with industry is, of course, an important part of this approach, but there are other benefits for a regulator as well:
- Having public priorities assists our staff internally when they are assessing and considering matters, and it provides them with clear direction and instruction from the Commission as to what is important.
- Public priorities hold us, as a regulator, accountable. If we say certain areas are enforcement priorities, then we should be held accountable for delivery against them. In the event that we have not delivered, we need to make sure we can clearly explain why we have not.
- In my experience, the public announcement of enforcement priorities tends to have a compliance effect in and of itself. If you are working in a sector we have identified as an area of concern, then you are more likely to start reviewing your company’s activities and practices, to make sure you do not become the focus of our regulatory attention.
The selection of our priorities is a relatively sophisticated process. We first do a detailed environmental scan, and then we undertake an emerging threats and harms assessment. We inform that work by closely monitoring the sectors we are regulating, and we conduct extensive data analysis across the complaints, intelligence and reports that come through to us. We liaise with other regulators, both domestic and international, and we analyse the issues that are emerging in other countries. We conduct significant discussions with stakeholders, through our multiple consultative committees, and we test our conclusions with those external committees. Once we have finalised the emerging threats and harms that we consider to be most significant in the coming period, we develop our priorities for ASIC’s work that will respond to those issues.
We also formulate specific priorities for our enforcement work. Our priorities for 2023 include topics such as:
- targeting the poor design and distribution of financial products
- pricing promises in insurance
- protecting financially vulnerable consumers from predatory lending practices or high-cost credit
- directors’ duties and governance failures.
Our enforcement approach
There are different schools of thought on what the enforcement approach of a regulator should be. At ASIC, we take the following approach.
First, we are proactive and strategic rather than reactive. We are not to investigate all potential breaches of the laws that we administer, and we need to make careful choices about which matters we take on. We generally select matters with a broad reach, which is likely to have a deterrent effect beyond the particular issue we are prosecuting. Because we cannot take action on all matters, those that we do take on must send a strong signal of deterrence to the sector more broadly.
Second, we should not be conservative in the selection of our cases. This means taking on cases where legal outcomes are not guaranteed. We must test the scope of the laws that Parliament has enacted to protect market integrity, consumers and investors, to ensure those laws have a wide protective application. Where the law is complex, new or open to interpretation, we are not doing our job if we do not fully explore its reach.
Third, we must be active in our public communications about these matters, so that people know what we are doing – and, just as importantly, what we are not doing – and why. Communication is a critical tool for deterrence, because all the enforcement activity in the world will have no deterrent impact if nobody knows we are doing it. Therefore, a big part of our strategic enforcement work is to make sure that we explain what we are doing and why we are doing it, and to send messages to the broader market that we have an active enforcement program.
eToro – A strategic enforcement case study
I thought I would give a case study of a recent matter we have taken legal action in, which in my view reflects this strategic approach. The matter is eToro, a case we filed just a week or so ago.
eToro markets and distributes a high-risk, complex and volatile investment product called a ‘contract for difference’ (CFD). ASIC has long had concerns about these products, which were infamously described by one Federal Court judge as ‘financial heroin hits’. We consider, and the court in that case considered, CFDs to be little more than gambling. We know that most people who invest in these products lose their money, and that those losses are substantial.
Following the Financial Services Royal Commission, the Australian Government brought in a suite of new legislation to protect consumers and investors. One new set of laws had the purpose of protecting consumers from being sold financial products that are unsuitable for their particular financial circumstances – the design and distribution obligations. These obligations require any issuer of a financial product to turn its mind to the appropriate target market for that product – that is, the consumers and investors that the product is appropriate for, given its particular characteristics – and to set that out in a document called a target market determination.
In the proceedings that we filed last week, we allege that eToro contravened the design and distribution obligations laws by not having in place an appropriate or adequate target market determination for CFDs – which, as noted above, are high-risk, complex and volatile.
This case demonstrates the elements of the strategic enforcement approach I have outlined. We identified the design and distribution obligations as an enforcement priority. We proactively looked for an appropriate case where we considered that investors were suffering significant harm. We were determined to bring proceedings given the harm we saw arising from the distribution of these products. We are taking action against a firm that is the largest player in the CFD market, with a significant public presence. If we are successful in the proceedings, it will send a deterrent message to others in the sector about the importance of compliance with the design and distribution obligations. That, of course, will protect other investors from exposure to these high-risk derivatives.
Delivering against our enforcement priorities – An interim report
I do not propose to give you a long list of our activity against each of our 2023 priorities, but one of the important aspects of setting public priorities is to be held to account for their delivery. And so, given it is halfway through the year, I will provide an interim stocktake on some of that work.
We have been active in relation to greenwashing. We have given guidance to industry. We have issued more than 20 infringement notices to a range of entities in relation to concerns we identified in their marketing and promotion, and we have filed civil penalty proceedings in the Federal Court in two proceedings. We have more to come.
The proceedings that we have filed against Mercer Superannuation and Vanguard Investments Australia, in very broad terms, allege misrepresentations by those firms in relation to investment exclusions. Specifically, we allege that each of those firms promised that they would exclude investments in companies associated with fossil fuels, in circumstances where we say they did not. It is appropriate to recognise that both sets of proceedings are being defended.
Targeting the poor design and distribution of financial products
We have also issued a large number of interim stop orders under the design and distribution obligations to prevent entities distributing financial products where we consider the target market determinations to be deficient. We have also brought proceedings in the Federal Court against American Express and Firstmac alleging contraventions of these obligations. We are concerned about the distribution of American Express credit cards through David Jones stores, and we allege that Firstmac did not take reasonable steps to ensure that its financial products were distributed in accordance with the target market determination it had established.
Pricing promises in insurance
Anyone who has renewed an insurance policy will be familiar with the various statements about the loyalty-based savings you will receive when you renew your policy. The savings are usually based on the number of policies you hold, or the years you have been with the insurer. We have taken action against the failure to keep these promises, which is sadly reminiscent of some of the conduct we saw at the Financial Services Royal Commission. Insurers are now remediating more than 5.6 million customers somewhere in the order of $815 million for these practices.
The Federal Court recently penalised Insurance Australian Limited (IAL), the country’s largest insurer, $40 million for this misconduct. This is the largest ever penalty imposed against an insurer for breaches of the financial services laws. MLC Life Insurance has been penalised $10 million for misleading customers and failing to provide benefits. And we have also recently commenced civil penalty proceedings against RACQ, alleging that it misled its customers in its Product Disclosure Statements about the pricing discounts for certain types of insurance.
Protecting financially vulnerable consumers from predatory lending practices or high-cost credit
We have taken civil penalty action recently against a car finance provider Money3Loans. We allege that it failed to properly assess whether customers, including vulnerable First Nations people, could meet their repayment obligations before entering loan contracts for the purchase of second-hand vehicles. We also currently have court actions against a number of other firms in relation to high-cost credit and what we say are unlawful charges and prohibitive fees against vulnerable customers.
Directors’ duties and governance failures
You will no doubt be aware that we have taken court action against the board of Star Casino, together with some senior executive officers of that company. I note that the individual respondents in that case include the former general counsel of Star. Our allegations include that particular money laundering risks were not addressed, and nor were particular issues appropriately escalated to the board. These allegations are being defended.
The Federal Court also recently imposed high penalties on two individual directors of GetSwift, a continuous disclosure case, including an individual penalty against one director of $2 million plus a 15-year disqualification order. We will continue our focus on governance and directors’ duties going forward.
This concise list of matters represents a small subset of our considerable enforcement and compliance work. My intent in setting out some of these cases is to demonstrate that we are determined to be a regulator that sets our priorities, and then delivers on them. There are many more cases to come.
The role of general counsel
I consider general counsel to have a special role when dealing with regulators, and in my work at both the ACCC and ASIC I have engaged regularly with general counsel representing firms across the economy, including many in the ASX 100.
What that experience tells me is that the approach, and even the personality, of the general counsel can be pivotal to whether a significant matter is able to be effectively resolved with a regulator, or not. By ‘significant’, I mean those matters where the stakes are high both for the company being investigated, and for the regulator.
From time to time, I will engage directly with general counsel, and I use that engagement to assess for myself whether that person is someone who might be a conduit from the regulator directly to the business and/or the board in relation to the matter. Often those within the business are angry about regulatory action. Understandably, they might perceive it as unfair or feel their firm has been singled out. They may point to others in the market who they say are engaging in the same conduct. They say they have stopped the conduct, they have remediated the consumers, or they have engaged external consultants to conduct an independent review. They query the utility of our legal action.
An effective general counsel, in my experience, is able to go back and explain to the business the regulatory purpose of the action. They will be familiar with the practices and processes involved; they will know how the regulator works internally; they ‘know the drill’. They will interpret that for the business, and engage and persuade, where appropriate, to assist bring about a resolution that both parties can live with.
Sometimes, of course, they cannot achieve that, or they legitimately form the view that the matter should not resolve. Even in those circumstances, it is helpful to know that the issues have been fully explored. While we might agree to disagree, we can then both move on with the litigation process, without expending further efforts on potential resolution. This is to the benefit of both sides.
Thank you for having me here today. I look forward to taking your questions.