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BFCSA: ASIC's 'why not litigate' strategy kills enforceable undertakings

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ASIC's 'why not litigate' strategy kills enforceable undertakings

Australian Financial ReviewMay 16, 2019 7.00pm

Misa Han, James Eyers, Edmund Tadros


The corporate watchdog's chief enforcer Daniel Crennan, QC, has called time on much-maligned enforceable undertakings as a way to eliminate misconduct from the banks, but the regulator's strategy of taking more court action has been attacked by its global overseer.

Mr Crennan told the Australian Securities and Investments Commission annual forum on Thursday that in the "post-royal commission world" enforceable undertakings are "fairly unlikely to be provided" by the regulator because they do not require an admission of liability.

He said it was "unsurprising" that in the past enforceable undertakings were used by the regulator given civil penalties were not available for financial institutions that breached their cornerstone obligation of acting efficiently, honestly and fairly.

However, that has changed after the government passed laws allowing ASIC to pursue fines of up to $25 million per breach through the court system.

ASIC's enforceable undertakings registershows the regulator has entered into an enforceable undertaking only once so far this year, with a Gold Coast accountant Jenan Thorne.

In comparison, last year ASIC entered into enforceable undertaking 20 times, including with the Commonwealth Bank and ANZ over their practice of charging fees for no service and their distribution of retail superannuation products, and in CBA's case over its involvement in manipulating the bank bill swap rate, a key interest rate.

Enforceable undertakings have been used in the past as an alternative to a court action because it is quicker and cheaper to get an undertaking than to go through a court process.

However ASIC's reliance on this route, as well as settlements with large financial institutions done behind closed doors, was criticised by the Hayne inquiry.

The regulator has since made a virtue of its revamped 'why not litigate' strategy with ASIC chairman James Shipton on Thursday again emphasising it would "use the full extent of our new penalties and powers" to take court action where appropriate.

However, Ashley Alder, the CEO of the Securities and Futures Commission of Hong Kong said he was "confused" about ASIC's new "mantra" and said his focus had shifted to using supervisory and enforcement powers "far more creatively". Mr Alder is also chairman of the IOSCO board, which oversees the globe's securities regulators.

He said the public had come to accept that misconduct in the financial services sector was endemic due to "pressures and conflicts of interest". Despite this the public reckoned that in many cases it was due to individuals, rather than systemic industry-wide issues and so consumers wanted decisive action taken by fast-moving regulators, he said.

"The result of all of this is we have found the public depend on the regulator and want to be confident that the regulator is very watchful and will intervene early, not wait for three, four or five years to run a traditional enforcement case."

He said the Hong Kong regulator had "repurposed" its powers and "combined a few of them quite creatively to get a ahead of problems and intervene".

This included the ability to "stop transactions in their tracks before harm occurs".

He also said the freezing of assets had been vital to ensure funds were available to remediate customers.

Mr Crennan said sometimes the community had unrealistic expectations about ASIC's litigation enforcement strategy.

"The expectations – as much as I admire their enthusiasm – are in a sense, unrealistic," he said.

He said unlike some of its international peers ASIC lacked many powers in its regulatory toolkit.

"We do not have the power to impose civil penalties, let alone put people in prisons or heads on sticks. So we must seek civil penalties through the court system."

He said the court system has improved, for example by allowing ASIC to file a short statement rather than an "incomprehensible", "100-page" statement of claim, but acknowledged court processes take time.

Earlier on Thursday, Mr Shipton said the regulator was working towards meeting its new responsibilities following the Hayne royal commission, including an expanded role for ASIC to become the primary conduct regulator in superannuation.

Mr Shipton said ASIC had adopted its 'why not litigate' stance even before the final report from the Hayne commission was released in February, but clarified the approach. "This is a very different concept to a 'litigate first' or 'investigate everything'.

"The aim of this is to deter future misconduct and address community expectations that wrongdoing be punished and publicly denounced through the courts.

"This 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 the question, 'why not litigate this matter?' "

Mr Shipton said in addition to litigation, the commission would use data analytics more to detect misconduct early.

ASIC had also been using its close and continuous monitoring supervisory approach since October to place ASIC members on site at the big four banks and AMP.

He said ASIC was also reviewing the corporate governance practices of big four banks, AMP and other financial services firms and other ASX100 companies, including looking at the bonuses paid to their executives, and will publish its findings in the second half of the year.



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