ASIC Performance Review by Senate Economics Committee

Friday 21 February 2014 @ 10.27 a.m. | Corporate & Regulatory | Trade & Commerce

In the last two days (19 and 20 February 2014) the Senate Standing Committees on Economics has been holding public hearings under its brief to review The performance of the Australian Securities and Investments Commission (ASIC).

The hearings come amidst continuing criticism of ASIC's lack of muscle in terms of the severity and deterrent value of the penalties that it is able to impose and the high cost of its operations in taking action against companies and corporate officers to have such penalties imposed.

Background

The initial referral for the inquiry from the Senate was on 20 June 2013. The inquiry was to be into the performance of the ASIC and to be undertaken by the Senate Economics References Committee (the Committee). On 14 November 2013 the Senate agreed to the Committee’s recommendation that this inquiry be re-adopted in the 44th Parliament (post the September 2013 election). Following the election, the Committee, while it had initially invited submissions to be lodged by 21 October 2013, continued receiving late submissions until 10 January 2014 and as stated above has recently held public hearings.

The Committee is due to report on 30 May 2014.

The Committees terms of reference are to review the performance of ASIC, with particular reference to:

  • ASIC's enabling legislation, and whether there are any barriers preventing ASIC from fulfilling its legislative responsibilities and obligations;
  • the accountability framework to which ASIC is subject, and whether this needs to be strengthened;
  • the workings of ASIC's collaboration, and working relationships, with other regulators and law enforcement bodies;
  • ASIC's complaints management policies and practices;
  • the protections afforded by ASIC to corporate and private whistleblowers; and
  • any related matters.

To date the Committee is reported to have received some 418 submissions from the public relating to ASIC’s powers, accountability, relationships with authorities, and management of complaints and whistleblowers. The period for submissions has now closed (10 January 2014).

What is Emerging

The Australian in a report on the inquiry indicates that submissions have ranged across the business community and "included business owners, accountants and company directors who raised cases of regulatory failure and complained of high costs and a lack of 'in-house commercial acumen and understanding of the complex business operating environment found in Australia'".

ASIC chairman Greg Medcraft is reported to have acknowledged that ASIC "had to be more transparent and open in communicating with the public, and [had to] improve its dealings with whistleblowers". Mr Medcraft is also reported as having strongly defended ASIC staff in the hearings before the Committee and is quoted as saying:

"Chairman, one disappointing thing about some of the submissions was the inflammatory tone of criticisms made - particularly about ASIC staff. . . ASIC has exceptional employees. They are men and women who work at ASIC for good reason. This is because they believe in the public interest".

Mr Medcraft also acknowledged, it is reported, that many of those making submissions had suffered financial losses, defending this by saying that “no financial regulator can prevent all losses from occurring” and indicating that ASIC needed stronger licensing, investigation and enforcement powers, as well as tougher penalties for wrongdoers to help curb criminal behaviour at the corporate level.

Penalties

In a very critical article today's issue of The Conversation refers to the penalties that ASIC can seek to have imposed through the Courts as being "insignificant" for the purpose of deterring corporate crime and breaches of the corporate laws.

"The upper limit of the penalty for directors and officers who breach their duties under the civil penalty scheme is still $200,000. This is without doubt a considerable sum...But it does not lead to significant fines for individual directors who breach their duties."

As an example to support  this the article quotes the James Hardie case, where the Court of Appeal reduced penalties imposed by the trial judge on directors from "$30,000 to $25,000 for the Australian directors and to $20,000 for the US directors".

It seems clear that a public perception exists that penalties are not high enough, not tough enough where corporate laws have been breached and, as The Conversation says, legislative change is required to make them higher and tougher.

"It is perfectly clear from these and other cases that without legislative intervention to raise the upper limit of the penalty, we will continue to see relatively insignificant penalties handed out to directors."

Costs

The other key problem for ASIC apart from penalties is reported to be "a cumbersome and costly civil penalty scheme where cases can cost many millions". For example, as The Conversation points out, to ensure defendants are not exposed to penalty during proceedings, they are not obliged to specify their defences until ASIC’s case has closed. This results in ASIC being forced to plead all possible alternatives, an approach which increases the "complexity of its case and the time required to present it in court. Unsurprisingly, court time is wasted and costs escalate alarmingly".

One positive that could come from the Senate Committee's inquiry could be "accessible, efficient and powerful options that can be pursued through the courts" so that ASIC's position as the regulator of companies and markets is not undermined.

As already mentioned, the Committee is due to report at the end of May 2014 and it will be interesting to see if and how it tackles the two key issues emerging so far from its review.

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