Introductory Info

Date introduced: 24 October 2018
House: House of Representatives
Portfolio: Treasury
Commencement: Schedules 1 to 4 commence the day after the Act receives Royal Assent.

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (the Bill) is to strengthen the criminal and civil penalties for financial sector misconduct that apply under the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 (the ASIC Act), the National Consumer Credit Protection Act 2009 (the Credit Act), and the Insurance Contracts Act 1984. Taken together these Acts are referred to as the ASIC administered legislation throughout this Bills Digest.

Structure of the Bill

The Bill as originally introduced consisted of four schedules:

• Schedule 1 amends the penalty provisions under the Corporations Act
• Schedule 2 amends the penalty provisions under the ASIC Act
• Schedule 3 amends the penalty provisions under the Credit Act (including the National Credit Code) and
• Schedule 4 amends the penalty provisions under the Insurance Contracts Act.

The Government successfully amended the Bill in the House of Representatives to add a fifth schedule which would further amend the penalty provisions of the Corporations Act, the Credit Act and the Insurance Contracts Act contingent on the passage of a number of other Bills.[1]

Background

A number of reviews have considered the existing powers and penalties that the Australian Securities and Investments Commission (ASIC) has at its disposal to deal with misconduct and crimes in the financial sector. These reviews, which are discussed below, have consistently supported the need to enhance the penalty regime for financial market misconduct; however, they have also noted that increased penalties alone are not sufficient to deter and prevent the type of financial sector misconduct that has occurred in recent years. ASIC also needs to utilise its powers, and pursue these penalties more effectively.

Sufficiency of ASIC’s existing penalties

The final report of the Financial System Inquiry (FSI) established by the Government in 2013 noted that the penalties that apply to financial sector misconduct in Australia are low by international standards and are unlikely to act as a strong deterrent. It recommended stronger penalties be examined and disgorgement[2] penalties be considered:

... the maximum penalties in Australia for contravening laws governing financial sector conduct are low by international standards. For example, ASIC cannot seek disgorgement of profits in relation to civil contraventions. As such, current penalties are unlikely to act as a credible deterrent against misconduct by large firms. While the Inquiry recommends substantially higher penalties, it does not believe that Australia should introduce the extremely high penalties for financial firms recently seen in some overseas jurisdictions.[3]

The Senate Standing Committee on Economics conducted an inquiry into the Performance of ASIC in 2014. It similarly considered that there was merit in reviewing the penalties available to ASIC and having disgorgement as an option:

ASIC's enforcement role is one of its most important functions. ASIC needs to be respected and feared. It needs to send a clear and unmistakeable message, backed-up and continually reinforced by actions, that ASIC has the necessary enforcement tools and resources and is ready to use them to uphold accepted standards of conduct and the integrity of the markets. To assist ASIC with this, the penalties currently available for contraventions of the legislation ASIC administers should be reviewed to ensure they are set at appropriate levels. Monetary penalties may also need to become more responsive to misconduct, with multiple of gain penalties or penalties combined with disgorgement considered [emphasis added].[4]

ASIC enforcement review

In response to the recommendation of the FSI, the Government announced the establishment of the ASIC Enforcement Review Taskforce on 19 October 2016.[5] Among its terms of reference was a requirement to examine ‘the adequacy of civil and criminal penalties for serious contraventions relating to the financial system (including corporate fraud)’ and ‘the adequacy of existing penalties for serious contraventions, including disgorgement of profits’.[6]

The Taskforce issued a consultation paper entitled Strengthening Penalties for Corporate and Financial Sector Misconduct and sought submissions from interested stakeholders during the period 17 October to 17 November 2017.[7]

The final report of the taskforce (Taskforce Report) was released in December 2017.[8] The Taskforce Report supported arguments that the ‘quantum’ of penalties available for corporate and financial sector misconduct were insufficient and the ‘pathways’ to apply these penalties were too narrow.[9]

The Taskforce Report made a number of recommendations in relation to penalties, including:

• increasing the maximum imprisonment penalties for criminal contraventions of ASIC administered legislation[10]
• increasing the maximum pecuniary penalties for criminal acts. These pecuniary penalties should be based on formula calculated with reference to the maximum available term of imprisonment[11]
• increasing civil penalty amounts[12] and expanding the types of misconduct to which civil penalties may be applied[13]
• expanding the set of provisions which are subject to ASIC’s infringement notice regime[14]
• removing imprisonment as a punishment for strict and absolute liability offences and introducing a number of ordinary offences to complement these strict and absolute liability offences[15]
• making disgorgement remedies available in civil penalty proceedings brought by ASIC[16] and
• amending the Corporations Act to require courts to give priority to compensation.[17]

Government response

The Government released its response to the Taskforce Report on 16 April 2018.[18] The Government agreed to the recommendations of the taskforce in relation to penalties and this Bill seeks to implement those recommendations.

ASIC’s approach to enforcement

The Commissioner, Kenneth Hayne, wrote in the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Banking Royal Commission) that there is value in expanding penalties for market misconduct, but also argued that the benefits will depend on the extent to which ASIC seeks to apply them:

ASIC pointed to gaps in its powers. The ASIC Enforcement Review Taskforce has recommended that ASIC’s powers be expanded and some penalties increased. Final adoption of those recommendations has been said to depend upon the recommendations made by this Commission. At this point, it is enough to say that there appears to be good reason to make the several changes recommended but that the effect of making those changes depends entirely upon the way in which the provisions are implemented. In particular, increased penalties for misconduct will have only limited deterrent (or punitive) effect unless there is greater willingness to seek their application [emphasis added].[19]

In this regard, Commissioner Hayne was highly critical of ASIC’s past approach to seeking penalties for financial sector misconduct. He noted that ASIC has rarely sought to have civil penalties applied and ASIC has not commenced criminal proceedings against any financial institutions, only individuals:

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

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 [emphasis added]...[20]

And further:

...When banks have disclosed, or ASIC has otherwise learned of, misconduct, ASIC has almost always sought to negotiate what will be done in response. Very often, remediation of customers has taken centre stage. Sometimes ASIC has used its banning powers to have one or more individual excluded from further participation in the industry. Rarely has ASIC gone to court to have the defaulting party penalised. The criminal prosecutions that have been brought have all been directed at individuals. Civil penalty proceedings have seldom been brought. Enforceable undertakings have been negotiated and agreed on terms that the entity admits no more than that ASIC has reasonably based ‘concerns’ about the entity’s conduct. ASIC has issued infringement notices. But by paying the infringement notice the entity makes no admission. It is not taken to have engaged in the relevant contravention. Yet, ASIC and the Commonwealth are prevented from starting a civil or criminal proceeding in relation to the contravention that caused ASIC to issue to the infringement notice.[21] [emphasis added]

In the final report of the Banking Royal Commission, Commissioner Hayne made recommendations about ASIC’s approach to enforcement, particularly in relation to the litigation of criminal and civil contraventions of the ASIC administered legislation. The Commissioner recognised that ASIC is in the process of reforming its enforcement function (partly in response to the findings of the Commissioner’s interim report). However, the Commissioner recommended that ASIC’s progress in reforming its enforcement function be closely monitored and, if necessary, further consideration should be given to developing a specialist agency to undertake ASIC’s litigation function.[22]

The Commissioner also made recommendations in relation to ASIC’s use of infringement notices which are pertinent to this Bill. While not commenting specifically on this Bill, the Commissioner recommended that ASIC’s enforcement policies be redrawn to recognise that ‘infringement notices should principally be used in respect of administrative failings by entities’ and that ‘the use of infringement notices for provisions that require an evaluative judgment will rarely, if ever, be appropriate’.[23]

Further, he considered ‘that beyond purely administrative failings, infringement notices will rarely be the appropriate enforcement tool where the infringing party is a large corporation’.[24] This recommendation is notable in relation to this Bill which seeks to broadly expand ASIC’s infringement notice regime, including to additional matters which would require the element of evaluative judgment highlighted by the Commissioner. Further discussion of this issue is included in the ‘Key provisions and Issues’ heading in this Bills Digest.

Committee consideration

Senate Standing Committee for the Selection of Bills

The Senate Standing Committee for the Selection of Bills decided that the Bill should not be referred to a committee for inquiry.[25]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee) considered the Bill in its Scrutiny Digest of 14 November 2018.[26] The Scrutiny Committee raised two issues with the Bill, namely:

• a number of the proposed offences in the Corporations Act involve a reversal of the evidential burden of proof and[27]
• the application of strict and absolute liability offences that have a financial penalty that is higher than generally considered appropriate.[28]

Reversal of the evidential burden of proof

The Scrutiny Committee noted that a number of the civil penalties that the Bill proposes to insert within the Corporations Act have offence-specific defences which place the evidential burden on the defendant to prove that the particular defence applies. The Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers states that offence-specific defences are generally only appropriate where the details of the defence are peculiarly within the knowledge of the defendant or it would be significantly more costly or difficult for the prosecution to disprove than the defendant to establish the defence.[29]

The Scrutiny Committee sought an explanation from the Treasurer about why it was considered appropriate for the Bill to apply offence-specific defences where:

• there is a failure to lodge a notice with ASIC under a notification provision of the Corporations Act
• a defective disclosure document or statement is provided or
• certain recommendations or offers are made in relation to a managed investment scheme.[30]

The Treasurer’s response to the Scrutiny Committee’s request was that the Bill does not seek to amend the offence-specific defences for these contraventions but rather modernises the provisions and adds additional civil penalties for these contraventions.[31]

In its Scrutiny Report of 15 December 2018 the Scrutiny Committee requested that the Treasurer’s explanation be reflected in the Explanatory Memorandum.[32] Beyond this, it had no further comment on the explanatory material provided by the Treasurer.[33]

Strict and absolute liability offences

The Scrutiny Committee noted and welcomed that the Bill seeks to remove imprisonment as a penalty for a number of strict and absolute liability offences within the Corporations Act, the ASIC Act and the Credit Act.[34]

However, the Scrutiny Committee also noted that the new maximum financial penalty amounts applied to replace these imprisonment penalties are higher than is considered generally appropriate for strict and absolute liability offences.[35] The Scrutiny Committee sought to draw its concerns to the attention of the Senate to determine whether the applied penalties are appropriate.[36]

The Revised Explanatory Memorandum to the Bill provides justification for the penalty amounts on the basis that the penalties should act as a significant deterrent for financial and corporate misconduct.[37]

Policy position of non-government parties/independents

The Australian Labor Party (ALP) generally supports the intent of the Bill. Shadow Minister for Financial Services, Clare O’Neil indicated the ALP’s support for higher penalties for corporate and financial sector misconduct:

All in all, the ASIC review task force produced a set of recommendations that we are generally supportive of. We're generally supportive of strengthening penalties in the way that's being done in this Bill...[38]

The ALP moved amendments in the House of Representatives which would, if adopted, increase some of the penalties proposed by the Bill. The ALP moved two proposed amendments in both the House of Representatives.

• the first would remove the proposed 1 million penalty unit cap on civil penalties for body corporates that are calculated based on ten per cent of the turnover of the body corporate[39]
• the second would increase the maximum term of imprisonment for some criminal offences in the Bill from the ten years proposed in the Bill to 15 years.[40]

Speaking in relation to the first of the proposed amendments, Ms O’Neil argued that the proposed cap would benefit larger financial institutions:

For reasons that aren't clear to Labor, the government has decided to effectively undermine the fairness of the cap on civil penalties of 10 per cent of turnover, by effectively reducing the exposure of larger institutions. I want to be really clear, firstly, that Labor supports the 10 per cent of turnover limit for penalties. We don't support the additional restriction of one million penalties cap in the Bill.[41]

In relation to the second of these proposed amendments Ms O’Neil stated that it was appropriate to apply increased penalties following the findings of the Banking Royal Commission:

There is a very good and very simple reason why it's appropriate to increase penalties above and beyond what was advised in the ASIC Enforcement Review. The ASIC Enforcement Review occurred in 2017. It was before the Banking Royal Commission. I don't think there's a person in this chamber who has not been disgusted and shocked by the things that have come out of that Royal Commission. It is abundantly obvious that the way that criminal law is framed at the moment at the federal level is not preventing people from engaging in what are breathtaking breaches of the law.[42]

The proposed amendments were negatived in the House of Representatives.[43] Identical amendments have been tabled by Senator Deborah O’Neill in the Senate.[44]

The ALP has also questioned whether the proposed removal of imprisonment penalties for strict and absolute liability offences is appropriate, in light of ASIC’s concerns about this element of the reforms:

I [Ms Clare O’Neil MP] just want to note that there has been quite substantial debate about the government's Bill, which would seek to remove the custodial option from the absolute and strict liability offences. One of the most concerned parties about this aspect of the Bill is ASIC, who is meant to be enforcing these remedies. ASIC raised concerns, through the ASIC Enforcement Review, about what is proposed by the government in this Bill....

I just want it noted for the debate and discussion that will occur about this Bill that we have here our corporate regulator actively opposing the solution that the government has put forward. I think that's going to warrant some further conversation in the Senate.[45]

Senator Whish-Wilson of the Australian Greens has also tabled a proposed amendment (in similar terms to that of the ALP) to remove the proposed penalty unit cap.[46]

Position of major interest groups

There has been a considerable amount of consultation on the different aspects of this Bill, including consultation undertaken as part of finalising the recommendations of the Taskforce’s review[47] and Treasury’s consultation on the draft Bill and draft explanatory materials.[48] To date, the submissions on the draft legislation have not been published by Treasury. Submissions from the Australian Institute of Company Directors (AICD) and the Consumer Action Law Centre are available from their websites.[49]

Some of the specific issues raised during these consultations are discussed in the ‘Key Issues and provisions’ section of this Bills Digest.

Financial implications

According to the Revised Explanatory Memorandum to the Bill the proposed changes are not expected to have any financial impact.[50]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[51]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered the Bill in its Scrutiny Report of 27 November 2018 and stated that the Bill does not raise human rights concerns either because the Bill does not engage or promotes human rights, and/or permissibly limits human rights.[52]

Key issues and provisions

About penalties and offences

A failure to observe a provision of a Commonwealth statute is referred to as a contravention. Contraventions may give rise to a criminal offence or a civil penalty.

Criminal offences

A criminal offence is the benchmark against which other sanctions are measured. The key characteristic of a crime, as opposed to other forms of prohibited behaviour, is the repugnance attached to the act, which invokes social censure and shame.[53]

The Criminal Code Act 1995 contains the Criminal Code (the Code). Chapter 2 of the Code entitled ‘General Principles of Criminal Responsibility’ contains a comprehensive statement of principles that apply not only to all offences enacted in the Code but to all of the Commonwealth offences committed on and after 15 December 2001—unless the relevant legislation specifies that other provisions apply.[54] The principles in Chapter 2 of the Code cover matters such as:

• elements of an offence
• circumstances in which there is no criminal responsibility
• extensions of criminal responsibility
• corporate criminal responsibility and
• proof of criminal responsibility.

The standard of proof for a criminal offence is ‘beyond reasonable doubt’. The penalties for a criminal offence may be a fine or a term of imprisonment, or both. The Crimes Act 1914 is also relevant in that it deals with the amounts of penalties, including the method of calculating the penalty for a person or body corporate.[55]

Civil penalties

In addition to criminal offences, Commonwealth statutes may contain civil penalties. Currently, a civil penalty is generally assessed by reference to the seriousness of the contravention rather than by reference to the quantum of loss or profits flowing from the contravention.[56] In civil penalty proceedings under the Corporations Act, the court may relieve a person either wholly, or partly, from liability if the person has acted honestly and having regard to all the circumstances of the case the person ought fairly to be excused for the contravention.[57]

A civil penalty is an amount owing to the Commonwealth and payable—in the case of the ASIC administered legislation which is the subject of this Bills Digest—to ASIC on the Commonwealth’s behalf. It is treated as a civil judgment debt.[58]

The standard of proof for a civil penalty is ‘on the balance of probabilities’. Civil penalties provide an additional or alternative enforcement option, especially where there may be difficulty in proving the necessary fault element to establish a criminal offence.

What the Bill does

The Bill seeks to make a number of proposed amendments to penalty provisions within the ASIC administered legislation which are largely consistent with the recommendations of the Taskforce. The Bill proposes to amend the ASIC administered legislation to:

• introduce increased penalties for criminal offences, including increased maximum imprisonment and financial penalties
  • the Bill introduces a proposed formula for calculating the maximum financial penalties for criminal offences that explicitly links it to the potential imprisonment term or to the turnover of the body corporate
  • the Bill also removes imprisonment as a possible penalty for strict and absolute liability offences
• increase the maximum financial penalties that apply to civil offences and expands the range of offences subject to civil penalties
• expand the infringement notice regime across the ASIC administered legislation
• introduce disgorgement (called relinquishment in the Bill) as a potential civil penalty
• clarify that courts are to prioritise the compensation of victims over the application of financial penalties.[59]

Criminal offences

The Bill seeks to increase a number of potential imprisonment and financial penalties for criminal offences under the ASIC administered legislation.

The majority of penalties for criminal offences under the Corporations Act are listed in the table in Schedule 3 of the Act—although some are referenced in the relevant offence provision. The penalties for offences under the ASIC Act, the Credit Act and the Insurance Contracts Act are set out in the offence provisions.

Increased imprisonment penalties for criminal offences

The Bill proposes higher imprisonment and financial penalties for offences across the ASIC administered legislation. The Bill proposes to increase the criminal penalties under the Corporations Act primarily by repealing the table in Schedule 3 of the Corporations Act and replacing it with a new table of penalty provisions. Where penalties are amended in the ASIC Act and the Credit Act the Bill seeks to amend the specific penalty provision.

The Explanatory Memorandum includes Table 1.1 and Table 1.2, which list the proposed maximum imprisonment term for a number of offences across the ASIC administered legislation (with the exception of the Insurance Contracts Act). Due to the large number of penalties listed, this information is not duplicated here.

Table 1.1 lists offences for which increased imprisonment terms of up to five years are proposed to apply.[60]

Table 1.2 lists thirteen offences under the Corporations Act for which the maximum imprisonment term will increase to ten years, aligning these penalties with the maximum penalties for the most serious misconduct under the Corporations Act.[61] Offences which currently carry a maximum imprisonment penalty of ten years in the Corporations Act include entering into agreements or transactions to avoid the payment of employee entitlements (section 596AB of the Corporations Act), market manipulation (section 1041A of the Corporations Act) and insider trading offences (section 1043A of the Corporations Act).

Additionally, a number of offences for which there were no existing imprisonment penalties would have maximum penalties of imprisonment applied. For example, there is a significant increase in the penalties for making false and misleading statements in a license application (subsection 1308(8) of the Corporations Act) where the maximum penalty would increase from five penalty units (currently $1,050[62]) to five years imprisonment.[63]

Formula for applying pecuniary penalties for criminal offences

The Bill also proposes to introduce a formula into the Corporations Act, the ASIC Act and the Credit Act to calculate possible additional fines for criminal offences where imprisonment is the only penalty specified. These financial penalties can be applied instead of imprisonment or in addition to imprisonment.[64]

These formulas link financial penalties to the maximum term of imprisonment applicable to the offence. Higher pecuniary penalties apply for more serious criminal conduct (with terms of imprisonment of ten years or more).

The maximum pecuniary penalty amounts for criminal offences proposed under each Act are as follows:

For individuals

If the maximum term of imprisonment is less than ten years, then the maximum financial penalty that can be applied to an individual is the number of penalty units equal to the term of imprisonment in months multiplied by ten.[65]

If the maximum term of imprisonment is ten years or more, then the maximum pecuniary penalty that can be applied is the greater of:

• 4,500 penalty units ($945,000) or
• if the court can assess the benefit derived and detriment avoided as a result of the criminal offence, three times that amount. [66]
  

For body corporates

If the maximum term of imprisonment is less than ten years for the offence then the maximum financial penalty that can be applied to a body corporate is the maximum penalty that applies to individuals multiplied by ten.[69]

If the maximum term of imprisonment is ten years or more, then the maximum financial penalty is the greatest of:

• 45,000 penalty units
• if the court can assess the benefit derived and detriment avoided as a result of the criminal offence, three times that amount and
• ten per cent of the annual turnover of the body corporate for the 12 month period ending in the month that the body corporate committed, or began committing the criminal offence.[70]

Penalties for absolute and strict liability offences

The Bill proposes to remove imprisonment as a potential penalty for strict and absolute liability offences across the ASIC administered legislation.[71] This is achieved by amending Schedule 3 of the Corporations Act, and amending the individual provisions in the ASIC Act and the Credit Act. Although the Insurance Contracts Act contains some strict liability offences, none of those offences carries a penalty of imprisonment. That being the case, there are no equivalent amendments to that Act made in the Bill.

In lieu of these penalties of imprisonment, the Bill proposes to increase the available pecuniary penalties for such offences. The Explanatory Memorandum to the Bill argues that the increases are consistent with the other pecuniary penalty increases in the Bill and, in the absence of potential imprisonment terms, necessary to ensure that the penalties continue to act as a strong deterrent.[72]

The Bill proposes amending the penalties for strict and absolute liability offences committed by individuals in the following manner:

• Offences that currently have no imprisonment term, and pecuniary penalties of less than 20 penalty units ($4,200) would have the associated pecuniary penalty increased to 20 penalty units for individuals and 200 ($42,000) penalty units for body corporates.[73]
• Offences that currently have no imprisonment term but have pecuniary penalties of greater than 20 penalty units will stay the same for individuals, but the new body corporate fine formula applies, so that the  fine for body corporates will be ten times the associated pecuniary penalty for individuals.[74]
• Offences which currently have an associated imprisonment term will have that imprisonment term removed but would be subject to increased pecuniary penalties of up to 180 penalty units  ($37,800) for individuals and ten times that amount for body corporates.[75]

The specific penalty amounts for strict liability offences which have pecuniary penalties of more than 60 penalty units applied for individuals and 300 penalty units for body corporates are listed at Table 1.5 of the Explanatory Memorandum.[76]

The Bill also introduces a number of new ordinary criminal offences (fault-based offences) to complement some of the strict and absolute liability offences within the Corporations Act. Currently, the strict and absolute liability offences within the Corporations Act depend entirely on the physical elements of the offence (that is, whether the person did something, or did not do something). There is no differentiation in the penalty if the prosecution can establish that the person or body corporate knowingly, or recklessly committed the offence.

The Bill sets out new ordinary offences (fault-based offences) with penalties including from two to five years imprisonment and/or additional pecuniary penalties where the prosecution can prove that the offence was committed intentionally or recklessly. These new offences are summarised in table 1.7 of the Revised Explanatory Memorandum to the Bill.[77]

Stakeholder views

Increased criminal penalties

Stakeholders who made submissions to the Treasury consultation on the Bill (and earlier consultations) generally supported the intent of increasing criminal penalties for market and financial sector misconduct.

In its submission to the Taskforce, ASIC indicated that it supports the increases to maximum imprisonment penalties, and in particular the elevation of the maximum term of imprisonment for serious offences to ten years.[78] However, ASIC indicated that it does not think that the increased maximum criminal penalty fines go far enough. ASIC submitted that the proposed formula for pecuniary penalties should be based on 15 times the imprisonment term in months for individuals and be multiplied by a further 15 for body corporates.[79]

Commenting on the draft legislation, the Australian Institute of Company Directors (AICD) stated that it supports increases in maximum imprisonment terms for offences which involve an element of dishonesty or deliberate misconduct but believes that current imprisonment terms for conduct which does not involve dishonesty are sufficient and should not be increased:

The AICD supports increases to the maximum imprisonment terms and financial penalties for offences involving dishonesty or deliberate misconduct, noting the court oversight involved.

However, in respect of offences that do not involve any element of dishonesty, there should be no increase to these imprisonment terms as proposed, as the existing maximum terms adequately reflect the gravity of the conduct involved.[80]

In contrast, the Consumer Action Law Centre (CALC) supports the increases in the maximum criminal penalties for offences under the ASIC administered legislation but remains concerned that courts may not seek to apply these maximum penalties:

...we note that Australian courts have adopted techniques and principles from criminal law in the setting of penalties, and that this can lead to the setting of lower penalties. For example, courts commonly adopt “instinctive synthesis” of various factors in the setting of penalties. Such an approach appears to eschew rational thought for mystery, relying on judicial knowledge and expertise in reaching the appropriate penalty rather than reflecting community standards and expectations or the seriousness of the conduct. A particular concern with this approach is that it is rarely considered appropriate for a court to commence with the maximum penalty and proceed by making a proportional deduction from that maximum. This may limit the effectiveness of law reform that increases maximum penalties alone.[81]

CALC argues that the legislation should be amended to require a court to consider both the deterrence effects of any applied penalties and whether or not they meet community expectations.[82]

Penalties for absolute and strict liability offences

ASIC has stated that it does not support the removal of imprisonment as a potential penalty for strict and absolute liability offences:

We consider that to remove imprisonment as a possible sanction from strict liability provisions would undermine the important work that we do in prosecuting these offences. A key consideration for ASIC in our activities is deterrence and the removal of these sanctions would undermine that objective.[83]

In contrast, the AICD strongly supports the removal of imprisonment for strict and absolute liability offences and supports the introduction of new ordinary offences that allow for imprisonment penalties to be imposed by a court for more serious and intentional breaches of these offences.[84]

Civil Penalties

The Bill also increases a number of civil penalties across the ASIC administered legislation and adds a number of new contraventions that may be subject to civil penalties.

Currently section 1317E of the Corporations Act provides that if a court is satisfied that a person has contravened a civil penalty provision, it must make a declaration of the contravention. The provisions that are civil penalty provisions are listed in table form in that section.

The Bill repeals and replaces section 1317E. Proposed section 1317E of the Corporations Act (at item 114 of Schedule 1 to the Bill) specifies a larger number of civil penalty provisions for which ASIC may apply to the court for a declaration of contravention. The civil penalties for contraventions of the ASIC Act, the Credit Act (including the National Credit Code) and the Insurance Contracts Act are listed under the specific provisions of the relevant Act. Where an additional civil penalty is proposed these changes would be made through changes to the specific provision.

Table 1.8 of the Explanatory Memorandum to the Bill outlines the new civil penalty provisions that would be introduced by the Bill across the ASIC administered legislation.[85]

Maximum pecuniary penalty amounts for civil contraventions

The maximum pecuniary penalty amount that may be applied by a court (called a pecuniary penalty order) for a contravention of a civil penalty provision within the ASIC administered legislation is specified in each of the Acts, as follows:

For individuals

Under the Corporations Act the proposed maximum pecuniary penalty that can be applied to an individual for a contravention of a civil penalty provision is the greatest of:

• 5,000 penalty units ($1.05 million) or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount.[86]

Under the ASIC Act, the Credit Act and the Insurance Contracts Act the maximum pecuniary penalty that can be applied for a contravention of a civil penalty provision is the greater of:

• the penalty specified for that civil penalty provision or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount. [87]

For body corporates

Under the Corporations Act, the ASIC Act, the Credit Act and the Insurance Contracts Act the maximum proposed pecuniary penalty for a contravention of a civil penalty provision by a body corporate is the greatest of:

• ten times the penalty applicable to an individual, which in the case of the Corporations Act is 50,000 penalty units ($10.5 million) or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount or
• ten per cent of the annual turnover of the of the body corporate for the 12 month period ending in the month that the body corporate committed, or commenced the civil contravention
  • this penalty based on turnover is capped at a maximum amount of one million penalty units ($210 million).[88]

Stakeholder views

The AICD supports the expansion of the civil penalties regime, however, it argues that the court should only be able to calculate a penalty with respect to a company’s turnover if the amount of benefit derived and detriment avoided as a result of the contravention cannot be easily determined.[89]

The CALC supports the increase in civil penalties but is not convinced that the one million penalty unit cap is justified, arguing that a larger penalty may be appropriate for larger corporation:

...we are not convinced there is a strong policy justification for introducing a maximum limit on civil penalties of 1 million penalty units (currently $210 million). Setting a maximum does not recognise that there are very large differences in sizes of banks, insurers and superannuation funds, and that a penalty in excess of this amount may be appropriate in the context of very large corporations.[90]

As discussed above, the ALP and the Greens have moved amendments to the Bill that propose to remove the one million penalty unit cap that applies to civil penalties for body corporates based on their annual turnover.

The one million penalty unit cap was recommended by the Taskforce.[91] The Taskforce argued that the cap is consistent with the maximum applicable penalty under the Bank Executive Accountability Regime.[92]

Infringement notice regime

The ASIC Act, the Credit Act and the Corporations Act contain additional enforcement tools—being the right to issue infringement notices or penalty notices.[93] The Bill proposes to repeal section 1313 of the Corporations Act which contains the penalty notice regime.[94] To replace this penalty notice regime item 113 of Schedule 1 to the Bill inserts proposed Part 9.4AB—Infringement notices for other alleged contraventions into the Corporations Act so that the enforcement powers under that Act are consistent with those in the ASIC Act and the Credit Act.

ASIC may issue an infringement notice whenever ASIC has reasonable grounds to believe that a person has contravened an ‘infringement notice provision’.[95]A penalty under an infringement notice is payable to ASIC on behalf of the Commonwealth. ASIC can utilise infringement notices as an alternative to initiating legal proceedings for a contravention of the aforementioned provisions. However, ASIC is under no obligation to issue a notice in lieu of proceedings. If a penalty under an infringement notice regime is paid, then no further civil or criminal action can be taken and the payment is not considered an admission of guilt.[96]

The penalties that ASIC can seek by issuing an infringement notice under the ASIC Act are outlined in the table in proposed subsection 12GXB(2) (inserted by item 17 In Schedule 2 to the Bill) and range from six to 12 penalty units for an individual ($1,260 to $2,520) and 30 to 60 penalty units for a body corporate ($6,300 to $12,600).

The maximum infringement notice penalty that ASIC can currently apply for a contravention of a civil penalty provision of the Credit Act is one fortieth of the maximum civil penalty for that contravention.[97] The maximum infringement notice that can currently be applied for an offence under a criminal provision of the Credit Act is one fifth of the maximum penalty for the offence.[98]

Proposed changes to the Infringement notice regime

The Bill seeks to harmonise the existing infringement notice powers across the ASIC Act, the Credit Act and extend it provisions of the Corporations Act which are currently subject to a penalty notice regime.[99] The offences and provisions of the Corporations Act that would be subject to the new infringement notice provisions are all strict and absolute liability offences, and certain prescribed offences and civil penalty provisions.[100] The additional offences and civil penalty provisions will be prescribed in regulations under section 1364 of the Corporations Act. The maximum penalty that may be applied under an infringement notice under the Corporations Act would be:

• for a single contravention of an offence provision—half the maximum penalty that a court could impose on the person for that contravention[101]
• for multiple contraventions of an offence provision—the amount applicable to a single contravention multiplied by the number of contraventions[102]
• for a single contravention of a civil penalty provision—12 penalty units for an individual and 60 penalty units for a body corporate[103] and
• for multiple contraventions of a civil penalty provision—the amount applicable to a single contravention multiplied by the number of contraventions.[104]

The existing infringement notice regimes in the ASIC Act and the Credit Act would continue to operate with the regime being expanded to all strict liability offences under the Credit Act and some minor amendments to ensure harmonisation across the ASIC administered legislation.[105] Additionally, section 33C of the Insurance Contracts Act—which relates to the obligation of insurers to provide Key Fact Sheets to prospective customers—would become an infringement notice provision.[106]

The contraventions under the Corporations Act, the Credit Act (including the Credit Code) and the Insurance Contracts Act for which ASIC would be able to issue infringement notices are summarised at Table 1.9 of the Explanatory Memorandum.[107]

Appropriateness of penalty amounts

The Attorney-General’s Department’s A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (the Guide) provides guidance for the drafting of enforcement provisions, including suggesting appropriate maximum amounts payable under infringement notices. The Guide states that generally the amount payable under a notice should be one-fifth of the maximum penalty for both natural persons and body corporates, and that this amount should generally not exceed 12 penalty units for a natural person and 60 penalty units for a body corporate.[108] However, the Bill proposes that the amount payable under infringement notices issued in relation to offences under the Corporations Act and the Insurance Contracts Act be 50 per cent of the maximum penalty amount.[109] The revised maximum penalties proposed exceed the limits suggested in the Guide. For example, a body corporate that failed to lodge an annual report to ASIC under subsection 319(1) of the Corporations Act could be subject to an infringement notice of 600 penalty units, ten times greater than the amount recommended by the Guide.

Further the proposed penalties that can be applied under the infringement notice regime of the Credit Act are 50 penalty units for individuals and 250 penalty units for body corporates.[110] These penalties also exceed the amounts recommended by the Guide.

The Senate Committee for the Scrutiny of Bills drew the Senate’s attention to this inconsistency with the Guide.[111]

In line with the justification provided for the high maximum penalties for strict and absolute offences, the Explanatory Memorandum to the Bill indicates that the high amounts payable under infringement notices acts to serve as a deterrent and to prevent infringement notices becoming a ‘cost of doing business’.[112]

Stakeholder views

ASIC has indicated that it supports the expansion and harmonisation of the infringement notice regime.[113]

The AICD raised concerns about the expansion of the infringement notice regime, arguing that these powers should not be applied to the more serious offences within the ASIC administered legislation:

The AICD considers all the provisions proposed to be subject to the infringement notice regime to be subject to the infringement notice regime as relatively serious offences...

A breach of these more serious offences is not a minor matter, and should be prosecuted in a court...[114]

Although not specifically considering the content of this Bill, the Banking Royal Commission raised the issue of ASIC’s current use of the infringement notice regime, arguing that ASIC often uses its infringement notice powers instead of initiating civil penalty proceedings and does not require the companies issued with these notices to make an admission of guilt. It further notes that by issuing an infringement notice, ASIC and the Commonwealth are precluded from pursuing further civil or criminal actions:

ASIC has issued infringement notices. But by paying the infringement notice the entity makes no admission. It is not taken to have engaged in the relevant contravention. Yet, ASIC and the Commonwealth are prevented from starting a civil or criminal proceeding in relation to the contravention that caused ASIC to issue to the infringement notice.[115]

The expansion of the infringement notice regime and the increase in infringement notice penalties, without a change in ASIC’s approach to enforcement, could undermine the intent of the increased civil and criminal penalties proposed by this Bill.

Further, as previously discussed, the Banking Royal Commission argued that it would be rarely appropriate to apply infringement notice penalties to contraventions that involve an element of evaluative judgment. Several of the provisions to which the Bill seeks to extend the infringement notice regime would likely require some level of evaluative judgment.

Disgorgement penalties

What is disgorgement?

The Bill proposes amendments that would allow courts to apply a ‘relinquishment order’ to address a contravention of the various civil penalty provisions of the Corporations Act, the ASIC Act and the Credit Act.

Disgorgement, or ‘relinquishment’ in the language of the Bill, can be defined as:

... the removal of financial benefit (such as profits illegally obtained or losses avoided) that arises from wrongdoing, or the act of paying these monies, on demand or by legal compulsion. For example, any profit made by wrongdoing is 'disgorged' from those involved in the wrongdoing in addition any penalties that are imposed.

Disgorgement is a vehicle for preventing unjust enrichment. This means that disgorgement orders can offer significant deterrent value by reducing the likelihood that wrongdoers can consider penalties to be merely a business cost. ^[116]

Disgorgement provisions currently exist in the Proceeds of Crimes Act 2002, where the Commonwealth can seek forfeiture of property, financial benefits or profits obtained as a result of alleged criminal offences.[117]

However, ASIC does not currently have the ability to seek a disgorgement penalty in civil penalty proceedings.[118] The Taskforce recommended that a general disgorgement remedy should be made available in civil penalty proceedings bought by ASIC under the Corporations Act, the Credit Act and the ASIC Act.[119]

The amendments to the Bill provide for a court to issue a relinquishment order to pay ASIC (on behalf of the Commonwealth) an amount ‘equal to the benefit derived and detriment avoided because of a contravention of a civil penalty provision’.[120]

A court may make a relinquishment order:

• on its own initiative, during proceedings before the court or
• following an application from ASIC, so long as it is not more than six years after the alleged contravention.[121]

A relinquishment penalty may apply in addition to any civil penalty imposed by the court.[122] A court cannot impose a relinquishment order against a person who has been convicted of a criminal offence, and any relinquishment order is stayed if criminal proceedings are commenced.[123] However, criminal proceedings may be commenced regardless of whether a relinquishment order has been made against a person.[124]

Stakeholder views

The Consumer Action Law Centre supports the availability of relinquishment orders within the Bill. However, it argued that the amounts relinquished should be paid to consumers as compensation for misconduct, rather than as a penalty paid to the Commonwealth:

Consumer Action strongly supports the Bill's amendments to enable courts to make a relinquishment order if there has been a contravention of a civil penalty provision. A relinquishment order would enable ‘disgorgement’ of financial benefits that arise from misconduct and is a vehicle for preventing unjust enrichment. We consider that such orders can offer significant deterrence by reducing the likelihood that wrongdoers can consider penalties to be merely a business cost...

Consumer Action suggests, however, that the court be given the power to award these amounts directly to consumers in appropriate circumstances, not just to the Commonwealth. ^[125]

The Australian Finance Industry Association also argued that disgorgement remedies could be used to compensate consumers raising concerns that actions for compensation may be pursued notwithstanding the application of a disgorgement penalty:

We envisage where a disgorgement remedy is being sort that it is likely that there will be parallel proceedings for compensation. Any amount received under a disgorgement remedy should be made available to satisfy compensation orders. Otherwise a defendant could be penalised more than once for the same offence and this may result in amounts being ordered against that entity not aligning with the nature of the wrong doing.[126]

Priority to compensation

The Bill also makes amendments which require a court to give preference to compensating victims for losses suffered as a result of a contravention of the Corporations Act over applying civil penalties.[127] This preference already exists in the ASIC Act and the Credit Act.[128]

The Bill would require that the relevant court consider the impact that making a pecuniary penalty or relinquishment order would have on the amount of compensation that may be available and give preference to compensation and refunds.[129] The Bill also amends the existing arrangements in the ASIC Act[130] and the Credit Act to ensure they are consistent across the three Acts.[131]

Application provisions

The new penalties for criminal offences and civil penalty provisions re applicable to alleged contraventions that occur wholly on or after the commencement of the Bill.[132]

The amendments made in relation to infringement notices apply to infringement notices issued on or after the commencement of the Bill. However, these infringement notices may be issued for an alleged contravention that occurred prior to commencement.[133]

Schedule 5 – contingent amendments

Proposed Schedule 5, which was added to the Bill through Government amendments in the House of Representatives, adds a number of other criminal and civil penalty amounts that are contingent on the commencement of legislation that is currently before Parliament or which has been recently passed by Parliament.[134]