Chapter 3The current regulatory system
3.1This chapter provides an overview of the role of the Australian Securities and Investments Commission (ASIC). In particular, the chapter outlines ASIC’s mandate, investigation and enforcement powers, and organisational structure.
Introduction
3.2ASIC is Australia’s combined regulator for ‘companies, financial markets, financial services organisations, professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit’. ASIC is responsible for enforcing corporate law, including through litigation.
3.3Since its establishment, ASIC’s statutory mandate has grown substantially, and ASIC now has ‘one of the broadest’ mandates of comparable regulators globally. ASIC regulates a wide range of entities which differ in number, size and risk profile. For example, in 2021–22 ASIC’s regulated population included:
…24,036 unlisted public companies and 1,841 listed companies, 16,621 financial advisers, 6,288 Australian financial service (AFS) licensees, 4,720credit licensees and 39,711 credit representatives, 420 responsible entities, 51 licensed domestic and overseas financial markets, 1,183 securities dealers, 115 retail OTC derivatives issuers, 646 registered liquidators and 90superannuation trustees.
3.4ASIC has a wide range of functions, including to: register companies; license and monitor financial services and markets; undertake consumer protection activities; and enforce directors’ duties. ASIC also seeks to detect, investigate and punish breaches of corporate law. Indeed, ASIC has significant enforcement powers, including to compulsorily gather information, limit financial services licensees’ activities and commence civil and criminal proceedings.
3.5ASIC is established as an independent statutory authority under the Australian Securities and Investments Commission Act 2001 (ASIC Act). ASIC is led by a Commission, comprised of the Chair and commissioners, who are responsible for the management and administration of ASIC.
ASIC’s broad mandate
3.6This section provides an overview of ASIC’s broad mandate, including its regulatory functions, role in financial regulation and expanding responsibilities.
3.7ASIC’s mandate is formed by several acts which confer significant regulatory responsibilities on ASIC. For example, ASIC administers and enforces the:
the ASIC Act;
the Business Names Registration Act 2011;
the Corporations Act 2001 (Corporations Act);
the Insurance Contracts Act 1984; and
the National Consumer Credit Protections Act 2009 (NCCP Act).
3.8Most of ASIC’s work is performed under the CorporationsAct. Further, ASIC partly administers six other Commonwealth acts. ASIC can also take enforcement action regarding suspected contraventions of state and territory laws in relation to certain corporate and financial matters.
3.9A recent review by the Australian Law Reform Commission found that the Corporations Act and the ASIC Act were ‘incoherent’ and ‘maze-like’. Indeed, the CorporationsAct runs to more than 4000 pages and 800 000 words (having doubled in length since 2001) and contains more than 950 powers to make delegated legislation. Chapter 7 of the Corporations Act—which deals with financial products, services and markets—is ‘particularly complex,’ with a length equivalent to the tenth longest act of Parliament and subject to notional amendments that could be contained in one of more than 1400 regulations.
3.10The impact of Australia’s highly complex corporations law on ASIC’s regulatory functions is a key theme of this report.
Functions and objectives
3.11ASIC’s functions and objectives are stipulated by the ASIC Act.
3.12ASIC has the function of ‘monitoring and promoting market integrity and consumer protection’ in relation to the financial system and the payments system. ASIC describes its regulatory functions as follows:
financial services regulation—ASIC licenses and monitors financial services businesses to ensure that they operate efficiently, honestly and fairly. These businesses typically deal in superannuation, managed funds, shares and company securities, derivatives and insurance;
consumer credit regulation—ASIC licenses and regulates people and businesses engaging in consumer credit activities, including banks, credit unions, finance companies, and mortgage and finance brokers. ASIC ensures that licensees meet the standards set out in the NCCP Act; and
markets regulation—ASIC assesses authorised financial markets compliance with their legal obligations to operate fairly, orderly and transparently. ASIC supervises trading on licensed equity, derivatives and futures markets. ASIC also advises the Minister on authorising new markets.[14]
3.13Further, ASIC’s objectives are to:
(a)maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of theeconomy;
(b)promote the confident and informed participation of investors and consumers in the financial system;
(c)administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements;
(d)receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it;
(e)ensure that information is available as soon as practicable for access by the public; and
(f)take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.[15]
3.14Additionally, the ASIC Act requires ASIC to consider the effects of competition when performing its functions and exercising its powers.
ASIC’s role in regulating the financial system
3.15ASIC has key responsibilities in Australia’s so-called ‘twin peaks’ model of financial system regulation. Under the model, regulatory responsibilities are divided into two distinct supervisory objectives. The first peak, ASIC, is responsible for conduct regulation and disclosure. The second peak, the Australian Prudential Regulation Authority (APRA), is responsible for prudential regulation and promoting financial system stability.
3.16ASIC and APRA are required by law to cooperate to perform their respective ‘functions and powers effectively’. Below, Figure 3.1 illustrates ASIC’s and APRA’s respective responsibilities.
Figure 3.1Twin peaks of Australia’s model of financial system regulation
3.17Responsibility for other aspect of financial system regulation rests with several other Commonwealth entities. For instance:
the Reserve Bank of Australia is responsible for monetary policy, financial system stability (including as the lender of last resort) and payments systems;
the Australian Competition and Consumer Commission (ACCC) is responsible for the function of markets, fair trading and promoting competition;
the Australian Financial Complaints Authority (AFCA) is responsible for the external dispute resolution scheme for financial products and services; and
the Australian Transaction Reports and Analysis Centre (AUSTRAC) is responsible for anti-money laundering and counter-terrorism financing.
3.18The twin peaks model has been used in Australia for over 25 years, following recommendations made in the 1996 Financial System Inquiry (Wallis Inquiry).
3.19In 2019, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) recommended retaining Australia’s twin peaks model. In brief, the Royal Commission considered that it was ASIC’s enforcement culture that should be the subject of change, not the size of its remit. However, the Royal Commission proposed that consideration should be given to the establishment of a ‘specialist civil enforcement agency’ if it becomes apparent that ASIC ‘is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability’. In the Royal Commission’s view, the establishment of such an agency would preserve the twin peaks model.
3.20Submissions to the inquiry commented on the impact of ASIC’s remit and on the twin peaks model. For example, Associate Professor Andy Schmulow submitted that the size of ASIC’s remit had distorted Australia’s twin peaks model:
The irony is therefore withering, in that Australia – the benchmark example of Twin Peaks – does not have a dedicated financial-industry prudential regulator and a financial-industry conduct regulator. Instead, what we have is a dedicated financial-industry prudential regulator and a financial-industry-and-every-other-industry-and-everything-to-do-with-licensing-reporting- corporate-governance-(generally)-insolvency-money-commerce-business-and-the-economy- except-partnerships conduct regulator.
3.21Further, Associate Professor Schmulow argued that the Royal Commission ‘got it wrong’ in respect of ASIC’s remit, underestimating the scope of ASIC’s remit and the challenge involved in administering it. Additionally, MrJamesShipton, former Chair of ASIC, suggested that the establishment of a separate civil enforcement agency should be considered as an option to ‘right size’ ASIC’sremit.
ASIC’s expanding remit
3.22ASIC was established with extensive responsibilities and its responsibilities have since continued to expand. This expansion has come through the enactment of new laws, and changes to existing laws for which ASIC has responsibility. At the same time, the size of ASIC’s regulated population has increased. As the Chair of ASIC, MrJosephLongo recently wrote:
ASIC started life as a markets and corporate governance regulator; and, while those responsibilities remain key elements of its mandate, the original architects of the Corporations Law could not have foreseen the scope and range of ASIC’s remit today.
The expansion of ASIC’s regulatory responsibilities reflects a number of factors – the dynamism of our markets and financial system, the increase in uptake of financial services (notably superannuation), changes in community expectations over time, and regular attempts by legislators to address, with varying degrees of ambition, the increasing complexity and sophistication of the Australian financial services sector.
3.23The expansion of ASIC’s remit follows a long arc of corporate law reform which has resulted in the centralisation of responsibilities in a single, national regulator. For many years, companies were largely regulated by state and territory governments. The notion of a national companies law only began to gain acceptance in the late 1950s, and uniform companies acts were subsequently adopted in each of the states and territories between 1961 and 1963.
3.24It was not until 1978 that ASIC’s precursor, the National Companies and Securities Commission, was established to regulate the states application of federal companies and securities laws. This co-operative scheme continued until 1991, when the Australian Securities Commission (ASC) was established and amalgamated the corporate affairs functions of the states and territories.
3.25The ASC’s enabling act, the Australian Securities Commission Act 1989, was passed alongside the Corporations Act 1989 and significantly reformed corporations and securities law under a new, national scheme.In 1998, the ASC was renamed to ASIC to reflect that it had been assigned new responsibilities for consumer protection in the financial sector, which were previously administered by the ACCC. This change meant that ASIC would become the ‘pre-eminent consumer protection and market integrity regulator across the financial system’.
3.26Since then, there have been many occasions of ASIC being assigned further responsibilities. For example, in 2002, ASIC became responsible for financial services regulation, including banking, insurance, securities and superannuation.In2010, ASIC’s responsibilities expanded further when it took on consumer credit regulation under the NCCPAct, including for licensing requirements, general conduct obligations and responsible lending obligations. That same year, ASIC also took on responsibilities for regulating trustee companies, finance broking and supervising trading on Australian equity, derivatives and futures markets.
3.27A timeline of the changes to ASIC’s mandate is shown below inFigure3.2.
Figure 3.2Changes to ASIC’s mandate from 1991 to 2021
Source: Department of the Treasury, as presented in FRAA, Effectiveness and Capability Review of the Australian Securities and Investments Commission, July 2022, p. 19.
3.28The increases to ASIC’s responsibilities have resulted in a significant expansion of the size of ASIC’s regulated population. The size of ASIC’s regulated population has also increased as new regulated entities are established, and more financial products are created. Indeed, between 2010–11 and 2020–21 the number of companies registered by ASIC increased 61 per cent from 1.8million to 2.9 million. Over the same period, the number of Australian financial services licensees increased 27 per cent from 4883 to 6179.
3.29Further, ASIC’s remit is impacted by the size of the Australian economy and the large amount of financial activity. Australia has the world’s 12th largest economy and the 11th largest stock market. As of September 2022, Australian financial institutions held USD $7.3 trillion of assets, over five times nominal GDP. Moreover, Australians are highly exposed to financial markets. Around 16million Australians hold superannuation accounts, and over 50 per cent of adults hold investments outside of superannuation and property.
3.30Today, ASIC has one of the largest regulatory remits of any regulator in the world, including its counterparts in the United States, the United Kingdom, Germany, the Netherlands, Hong Kong, and New Zealand.
3.31ASIC’s remit is continuing to expand. A major example of this is ASIC ‘increasingly being called upon to play an active role in the prevention of consumer harm arising from financial products or services that are poorly designed or marketed, as well as the prevention of financial scams’. Indeed, scams are considered to be ‘one of the biggest problems’ currently faced by Australian consumers. As recently reported by consumer advocacy group Choice, scams cost Australians over $2.7 billion in 2023. ASIC has also recently reported on the significant and growing impact that scams are having on customers of Australia’s major banks:
Between 1 July 2021 and 30 June 2022, more than 31,700 customers of the four major banks collectively lost more than $558 million through scams. This was an increase of 49% in customers and 50% in financial losses compared to the previous 12-month period. During the same period, banks paid approximately $21 million in reimbursement and/or compensations payments to customers who fell victim to a scam.
3.32Further, recent examples of ASIC’s expanding remit include the transfer of responsibility for the Business Register from the Australian Taxation Office to ASIC in late May 2024. The Australian Institute of Company Directors observed that ASIC’s workload would increase further with the commencement of the Financial Accountability Regime.
Challenges of a broad remit
3.33The breadth of ASIC’s remit is directly relevant to its capacity to fulfil its mandate. In particular, ASIC’s ‘very wide remit’ means it has to make decisions about its regulatory priorities. The committee heard that one of the biggest challenges ASIC faces is prioritising its enforcement priorities. ASIC acknowledges that its remit constrains its investigation and enforcementcapacity:
The scale of our regulatory task, which covers the activities of many thousands of entities and a vast number of transactions, means we cannot progress every potential matter to investigation and enforcement. Like all regulators, we need to make careful, well-founded choices. We can only undertake a fraction of the potential regulatory and enforcement actions we identify through our own surveillance, reports of alleged misconduct and other data and intelligence.
3.34Concerns regarding the impact of ASIC’s remit on its ability to undertake its functions were raised by many submitters to the inquiry. For example, the Australian Small Business and Family Enterprise Ombudsman submitted that ‘ASIC’s broad remit requires significant resources and may be contributing to its reduced efficacy in investigating and enforcing action against corporate misconduct’. Maurice Blackburn Lawyers agreed with the view that ‘the breadth of ASIC’s role, and the sheer volume of economic activity falling within its remit, make effective enforcement action a substantial and difficultundertaking’.
3.35Further, the Australian Institute of Company Directors considered it ‘critical’ that ASIC’s resourcing be increased to ‘account for the depth of its regulatory activities and enforcement priorities’. The Consumer Action Law Centre also considered that ASIC’s resourcing should be increased:
A regulator needs to be able to be well informed about its regulatory remit. There is a need for greater resourcing for ASIC to monitor the wide sector it is responsible for. Providing ASIC with sufficient resourcing to continuously undertake meaningful data collection and analysis of the financial sector would permit the Government to legislate faster, from a more informed perspective.
3.36Former chairs of ASIC have also expressed concern about the scope of ASIC’s remit. For example, Mr Tony D’Aloisio, Chair of ASIC from 2007 to 2012, told the committee that two issues ‘created tension’ in relation to ASIC’s mandate. Firstly, Mr D’Aloisio said that while the Australian Parliament would pass legislation which expanded ASIC’s remit, the remit of that legislation would not always be clear. Secondly, Mr D’Aloisio considered that ‘ASIC was seen as a guarantor of last resort that had to actually stop losses occurring’, despite this not being supported by the design of the regulatory system. MrJamesShipton, Chair of ASIC from 2018 to 2021, submitted that ‘ASIC’s jurisdiction expanded without appropriations keeping pace, reducing ASIC’s overall “funding envelope” including for enforcement’. Mr Shipton added:
ASIC’s enforcement jurisdiction has become too large. It is being asked to do too much with too little. It has a larger breadth than most of its global peers, with more responsibilities added to it by successive governments. ASIC is one of the most complex regulatory agencies in the world. And even though many governments extended its jurisdiction, they failed to provide commensurate funding to support its (still) increasing jurisdiction.
3.37Moreover, some submitters considered that ASIC is failing to administer its broad remit. For instance, Mr Evan Jones argued that ‘ASIC has failed on the narrower agenda inherited from the ASC, and it has failed dismally on the grand remit accorded it by successive governments (and the Wallis Report) since 1998’. Mr Michael Sanderson contended that ASIC would have to be ‘many times its current size’ to carry out ‘appropriate due diligence’ on the complaints ASIC receives.
Approach to regulation
3.38ASIC’s approach to regulation enforcement is guided by the theory of strategic regulation, also known as responsive regulation. Responsive regulation promotes the use of enforcement tools of escalating severity ‘to respond to the different motivations of different actors’. These scaled enforcement sanctions are often described as the enforcement pyramid. Most regulatory activity occurs through less intrusive strategies such as persuasion and education, at the base of the pyramid. The most severe interventions, such as criminal penalties, are at the apex of the pyramid and used to respond to the most egregiousmisconduct.
3.39An example of the enforcement pyramid is shown below in Figure 3.3.
Figure 3.3Enforcement pyramid
Source: ASIC, Submission 1, p. 12 adapted from G. Gilligan, H. Bird and I. Ramsay, 'Civil penalties and the enforcement of directors' duties', UNSW Law Journal, vol. 22, no. 2, pp. 417–461.
3.40Despite the availability of enforcement tools under the enforcement pyramid, ASIC has been criticised for struggling to apply the pyramid effectively. For example, in 2019 the Royal Commission highlighted that it was inconsistent with the enforcement pyramid that serious breaches of law by large entities were not being met with ‘highest level of regulatory response’.
3.41Additionally, ASIC states that it takes a ‘harms-based, or problem-oriented’ approach to regulation to identify and respond to the most important risks within ASIC’s remit. ASIC balances its resources between addressing emerging issues, including reports of alleged misconduct, and the strategic priorities identified in its corporate plan.
Strategic priorities
3.42ASIC’s capacity to set and execute its strategic priorities is ‘central’ to ASIC’s overall effectiveness. ASIC’s priorities ‘focus’ its efforts on addressing areas or significant harm and ‘inform’ how ASIC responds to misconduct.
3.43ASIC’s priorities are determined using an annual ‘organisation-wide strategic planning process’ which uses data on threats and harms to identify the priorities ASIC will focus on for the next four years. The Deputy Chair of ASIC, Ms Sarah Court, explained ASIC’s approach to setting priorities:
…what we are trying to achieve by setting specific priorities is to identify those areas of conduct or harm that we think have the broadest potential detriment to consumers, to investors and to market integrity. …the enforcement teams have at front of mind the priorities the commission has set out. Those matters are then prioritised with particular targets within those enforcement groups.
3.44The ASIC Commission determines ASIC’s strategic priorities which include:
External priorities which target the highest-risk issues in ASIC’s remit; and
Internal priorities which focus on ASIC’s operational capabilities.
External priorities
3.45For 2022–26, ASIC’s external strategic priorities are:
Product design and distribution—reducing the risk of harm to consumers of financial and credit products from poor product design and other factors;
Sustainable finance—supporting market integrity through proactive supervision and enforcement;
Retirement decision making—protecting consumers as they plan for retirement, including by focusing on superannuation products; and
Technology risks—focusing on the impacts of technology in financial markets and services, including digitally enabled misconduct such as scams.
3.46As part of delivering its strategic priorities, ASIC is focusing on ‘six core strategic projects’ related to: scams; sustainable finance practices; crypto-assets; design and distribution obligations; cyber and operational resilience; and digital technology and data. Additionally, ASIC reports that it is undertaking 34industry-based, shorter-term projects to support its strategic priorities.
Internal priorities
3.47To strengthen its capabilities, ASIC has set the following internal priorities:
Digital technology—expanding the use of digital technology to support more efficient processes in ASIC’s regulatory work;
Data and analytics—increasing ASIC’s efficiency and effectiveness by improving access to information and adopting new analytical tools; and
People and resourcing—recruiting and retaining talent, enhancing ASIC’s skills and improving its budget and planning process.
3.48The Financial Regulator Assessment Authority’s 2022 review of ASIC considered that ASIC’s approach to setting strategic priorities was generally effective. However, the review identified potential areas for improvement, including how ASIC sets longer term priorities and how ASIC uses its strategic priorities to support decision-making.
Enforcement priorities
3.49In addition to its strategic priorities, ASIC sets annual priorities for its enforcement work. The purpose of the enforcement priorities is to communicate ASIC’s intent to industry and other stakeholders and provide a ‘clear indication’ of where ASIC will direct its resources.
3.50For 2024, ASIC has set the following twelve enforcement priorities:
enforcement action targeting poor distribution of financial products;
misleading conduct in relation to sustainable finance;
high-cost credit and predatory lending practices;
member services failures in the superannuation sector;
misconduct resulting in the systematic erosion of superannuation balances;
insurance claims handling;
compliance with the reportable situation regime;
conduct impacting small business including small business creditors;
enforcement action targeting gatekeepers facilitating misconduct;
misconduct relating to used car financing to vulnerable consumers;
compliance with financial hardship obligations; and
technology and operational resilience for market operators and participants.
3.51In addition to its annual enforcement priorities, ASIC has six enduring enforcement priorities. These are:
misconduct damaging market integrity;
misconduct impacting First Nations People;
misconduct involving a high risk of significant consumer harm;
systemic compliance failures by large financial institutions;
new or emerging conduct risks within the financial system; and
governance and directors’ duties failures.
3.52Frequently setting enforcement priorities has the potential to support ASIC in being responsive to emerging trends in the economy and financial markets. For example, ASIC has recently focused on predatory lending practices amid rising cost of living pressures:
Another area, just to give an example, is the issue of predatory conduct towards financially disadvantaged consumers or vulnerable consumers. We recognise that, moving into the current cost-of-living environment, a number of financially disadvantaged consumers are relying on alternative sources of credit, for example. We've got, as one of our enduring enforcement priorities, conduct that disproportionately impacts First Nations people, and so we are then looking at the suite of work and at the laws that are available to take those actions and ensuring that we have the staff, resources and teams allocated to make sure that we can drive forward investigations and cases in those areas.
3.53Further, ASIC states that the ‘public announcement of areas for enforcement can also have a compliance effect in and of itself’. The Consumer Action Law Centre submitted that ASIC began publishing its enforcement priorities in late2022 and considers this a ‘promising’ development in helping industry to improve practices before ASIC may need to consider taking enforcement action. As such, the Consumer Action Law Centre submitted that ASIC ‘should build on its enforcement priorities’ by adopting a ‘campaign approach’:
To deliver on these priorities, we encourage the regulator to adopt a campaign approach, which might include public communications about its concerns and expectations, producing information for the marketplace about good practice and compliance, raising issues directly with firms and sectors, undertaking investigations and thematic reviews, as well as taking enforcement actions.
3.54However, the committee heard from the Small Business Development Corporation (SBDC) that ASIC’s ‘current policy settings are insufficient to effectively deter poor behaviour’. In particular, the SBDC considered that ASIC’s enforcement priorities ‘do not strike the right balance, with ASIC insufficiently focused or resourced to pursue more reports of alleged misconduct’. In considering the balance of policy settings between ASIC’s reactive and proactive work on its enforcement priorities, Mr Shipton highlighted the importance of ASIC having clear expectations:
What you've essentially highlighted is the perennial challenge of the current regulatory system between ongoing supervision, surveillance, education and engagement and enforcement. Without the expectations, without clear guidance in statute and without an ongoing methodology for assessment, it is, I think, impossible for ASIC to make that decision. It's impossible for them because they don't have clear guidance. They can—and I'm sure they are trying very hard—to get that balance right.
Statement of expectations
3.55On previous occasions, the Australian Government has set out its expectations for how ASIC will use its powers and achieve its objects. ASIC responds to the government’s statement of expectations with a statement of intent.
3.56The last time the Australian Government issued a statement of expectations for ASIC was in August 2021. This statement was made by the previous government at the height of the COVID-19 pandemic. While the current government is reportedly preparing a new statement of expectations for ASIC, this had not occurred at the time of writing. The committee heard from Mr Shipton that the 2021 statement of expectations is ‘obsolete’ and that the government should issue a new statement as a ‘priority’.[94] Further, the Consumer Action Law Centre considered that a new statement of expectation could better reflect the ‘community’s expectations of ASIC’.[95]
ASIC’s significant powers of investigation and enforcement
3.57ASIC has extensive powers to aid its investigation and enforcement activities.[96] The key elements of ASIC’s powers are summarised below.
Investigation powers
3.58Under section 13 of the ASIC Act, ASIC has power to investigate suspected breaches of corporations law, and other Commonwealth, state or territory laws to the extent they relate to a body corporate or managed investment scheme. Additionally, section 247 of the NCCP gives ASIC the power to investigate suspected breaches of credit law and related matters.
3.59Central to ASIC’s investigation powers is its ability to compulsorily gather information. ASIC can use these powers to varying degrees during its formal investigations and, to a lesser extent, during its surveillance activities. ASIC may undertake surveillance of an entity to ‘obtain further evidence to determine whether formal investigation is warranted, or whether a better regulatory outcome would be achieved by other means’. When undertaking surveillance, ASIC can only use its ‘powers to inspect documents and compel the production of documents or the disclosure of information’.
3.60ASIC may undertake a formal investigation where it suspects there has been a contravention of law. In doing so, ASIC can use the full complement of its compulsory information gathering powers. These powers include:
the power to apply to a court for the issue of a warrant to search premises for books and records;
the power to seek the issue of warrants to obtain stored telecommunications data from service providers;
the power to require a person to attend an examination to answer questions on oath or to provide reasonable assistance;
the power to inspect books and records;
the power to compel the production of certain documents; and
the power to conduct administrative hearings related to ASIC's functions or powers, including the power to summon witnesses.
3.61ASIC’s use of compulsory information gathering powers between 2019–20 and 2021–22 is summarised below in Table 3.1.
Table 3.1Use of information-gathering powers, 2019–20 to 2021–22
| |
Requirements to appear for examination | 3027 |
Requirements to give reasonable assistance | 656 |
Requirements to produce documents | 8930 |
Requirements to provide information | 2288 |
Requirements to provide information or books (auditors and liquidators) | 212 |
Search warrants executed | 159 |
Total | 15 272 |
Source: ASIC, answers to questions on notice set 1, (received 18 November 2022)
3.62The commencement of an ASIC investigation is significant not just for the compulsory information gathering powers it triggers, but also for the subsequent proceedings that may occur due ‘the mere fact of the investigation’s commencement or upon evidence received during the investigation’.
3.63Further, statements made during an ASIC examination are admissible in subsequent criminal proceedings against the examinee. ASIC’s investigation report is also admissible in subsequent civil proceedings ‘as prima facie evidence of facts and matters disclosed’.
3.64Evidence provided to the committee suggests that ASIC’s powers of investigation are appropriate. For example, Dr Eugene Schofield-Georgeson provided research to the committee, based on former ASIC investigators’ views of ASIC’s coercive powers, which argued that ‘ASIC’s powers are well equipped to investigate corporate crime, but that ASIC rarely exercises these powers’. Further, Dr Schofield-Georgeson submitted that:
ASIC’s existing coercive investigation powers are fit-for purpose, amounting to something of a ‘gold standard’ in the view of investigators. A similar picture emerges when the laws are compared to those of similar international jurisdictions, particularly the US where investigators frequently struggle to bring corporate crime to heel. Rather, and according to ASIC’s own former investigators, the failings of ASIC in bringing corporate crime to justice are institutional.
3.65ASIC’s approach to investigation is considered further in Chapter 4.
Enforcement powers
3.66ASIC has extensive options to take a range of criminal, civil and administrative actions to ‘respond flexibly and proportionately to a broad range of individual and corporate misconduct’. Such options include:
criminal prosecutions for breaches of fault-based, strict liability and absolute liability offences under the Corporations Act;
disqualification of persons from managing corporations;
civil penalty provisions;
civil proceedings to which ASIC is a party;
infringement notices for alleged contraventions of strict liability and absolute liability offences and other provisions, such as continuous disclosure provisions; and
enforceable undertakings.
3.67Furthermore, ASIC can take a range of other protective administrative sanctions in relation to provisions of Chapter 7 of the Corporations Act in relation to financial products, services and markets. Such actions include: banning orders; suspension; varying or cancelling AFS licenses; product intervention orders; and product design and distribution obligations.
3.68For serious suspected breaches of the law, ASIC refers a brief of evidence to the Commonwealth Director of Public Prosecutions (CDPP) for the prosecution of criminal offences.[111] However, the number of referrals ASIC made to the CDPP has halved in the last five years to 41 referrals in 2022–23, as shown in Table 3.2.
Table 3.2ASIC referrals to the CDPP from 2018-19 to 2022-23
| | |
2018–19 | 86 | 75.6% |
2019–20 | 82 | 62.0% |
2020–21 | 80 | 63.8% |
2021–22 | 70 | 65.1% |
2022–23 | 41 | 19.5% |
Source: CDPP, answers to written question on notice set 2, 6 September 2023 (received 22 September 2023)
Discretionary powers
3.69ASIC has discretionary powers in respect of the Corporations Act. ASIC can ‘alter the application of the Corporations Act to a particular case or category of cases, effectively a discretionary power to rewrite part of the corporations law’. Further, ASIC can ‘exempt or modify the application to a person of provisions of Ch 6 (takeovers) of the Corporations Act, Ch 6A (compulsory acquisition) and Ch 6C (substantial shareholdings and tracing beneficial ownership in shares)’.
3.70Notably, the Corporations Act contains over 950 powers for ASIC to make subordinate legislation, including:
more than 880 regulation-making powers, with additional powers notionally inserted through the Corporations Regulations; and
around 68 powers ‘to make delegated legislation, often in the form of broad “exemption and modification” (notional amendment) powers’.
3.71Notional amendments are used extensively in the Corporations Act and are a ‘major source of complexity and incoherence affecting corporations and financial services legislation’. The Australian Law Reform Commission recently found that there are currently over 1200 notional amendments in force, affecting over 600 provisions of the Corporations Act and Corporations Regulations. In effect, this results in multiple versions of the law and users lacking certainty regarding which provisions of the law actually apply.
Expanding powers
3.72Following the Royal Commission, ASIC’s already extensive enforcement powers have been further expanded, along with increased penalties for breaches of corporations law. ASIC was given new powers to take stronger action against misleading conduct and reduce the risk of harm to consumers. These new powers:
…strengthened the criminal and civil penalties for financial sector misconduct and introduced a design and distribution obligations regime for financial services firms and a product intervention power for ASIC.
3.73Since March 2019 there has been a ten-fold increase in the maximum penalties that apply to corporate misconduct. For example, under the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019:
the maximum prison penalties for serious offences increased to 15 years—such as breaches of directors’ duties and dishonest conduct;
the maximum civil penalties for individuals increased to the greater of 5 000 penalty units (currently $1.565 million) or ‘three times the benefit obtained and detriment avoided’;
the maximum civil penalty for companies increased to the greater of 50 000 penalty units (currently $15.65 million); three times the benefit obtained and detriment avoided, or 10 per cent of annual turnover, capped at 2.5 million penalty units (currently $782.5 million).
3.74ASIC’s approach to enforcement, and the challenges posed by the complexity of the current regulatory framework, is considered further in Chapter 5.
Resourcing and governance
3.75ASIC is an independent statutory authority and, at present, is led by five commissioners.[122] In 2022–23, ASIC employed around 1800 staff and received $426 million in funding from the Australian Government.
3.76This section provides an overview of ASIC’s resourcing and governance.
Resourcing
3.77ASIC’s budget is determined by the Australian Government and its costs are largely recovered under the ASIC Industry Funding Model (IFM). In the 2022–23 financial year, ASIC’s budget of $485.5 million consisted of:
$426.3 million in departmental appropriations from government;
$32.3 million in revenue from independent sources; and
$26.8 million in capital appropriations.
3.78Between 2012–13 and 2022–23, government funding for ASIC increased 22 per cent from $350million to $426 million. Following the Royal Commission in 2019, the Australian Government provided an additional $400 million of funding to ASIC over four years, representing a 25 per cent increase on its 2017–18 funding levels.
3.79The majority of ASIC’s budget supports regulatory activities associated with enforcement, surveillance, and strategic support and corporate services. ASIC estimates that these activities made up approximately 82 per cent of its regulatory activities in 2023–24. In the 2021–22 financial year, total expenditure on these activities represented 93 per cent of ASIC’s internal budget, as shown below in Figure 3.4. ASIC ultimately determines the internal allocation of funding and resources across functional areas.[127]
3.80However, inquiry participants expressed concerns about whether ASIC’s current funding is commensurate with its broad regulatory remit. Issues concerning ASIC’s budget are discussed further in Chapter 6.
Figure 3.4ASIC's internal budget and staff allocation, as at 2021–22
Source: FRAA, Effectiveness and Capability Review of ASIC, July 2022, p. 9.
Industry Funding Model
3.81ASIC’s IFM commenced in July 2017, following a recommendation of the Financial System Inquiry that the Australian Government introduce a cost recovery model for ASIC. Prior to the IFM, ASIC was primarily funded by taxpayers through government appropriations.
3.82Under the IFM, ASIC recovers the costs associated with its regulatory activities from industry participants using levies and fees which reflect the cost of supervision and surveillance, enforcement, industry engagement, education, guidance, and other indirect costs. In 2021–22, industry funding levies were imposed on 52 industry sub-sectors. Fees-for-service are directly charged on individual entities for a specific service provided by ASIC.
3.83A significant proportion of ASIC’s budget is sourced from the IFM. ASIC estimated that approximately 83 per cent of its departmental appropriation for the 2021–22 financial year would be recovered under the IFM, bringing the total amount recovered by the scheme to $422 million for that period. This included:
$266 million for cost recovery;
$66 million for statutory levies; and
$17 million for fees-for-services.
3.84The amount recovered by ASIC under the IFM is less than the total departmental appropriation due to costs incurred by non-regulatory activities.
3.85Broadly, the IFM has been negatively received by participants to this inquiry. Industry participants have characterised the funding model as unfair, poorly administered, and counterproductive. Issues regarding the IFM are discussed further in Chapter 6.
Staffing
3.86To exercise its functions and duties, ASIC employs a wide range of staff under the ASIC Act. As of 30 June 2023, ASIC had 1831 full-time equivalent staff.The majority of staff were employed at either ASIC Level 4, ExecutiveLevel1, or Executive Level 2 employees. Fifty-seven of ASIC’s employees are classified as Senior Executive Services staff. The majority of ASIC staff are assigned to the Financial Services Enforcement, Markets, and Financial Services and Wealth teams, with each consisting of 194, 200 and 263 employees respectively.
3.87Inquiry participants expressed concerns regarding the skills and capacity of ASIC staff as well as ASIC’s staffing profile. Issues regarding ASIC staff and its broader staffing profile are discussed further in Chapter 6.
Governance
3.88ASIC is currently led by a five-person Commission comprised of the Chair, Deputy Chair and three commissioners. The Commission is ASIC’s ‘governing body and is responsible for achieving ASIC’s statutory objectives’. Further:
ASIC’s Commission acts as a strategic non-executive body focussing on high-level regulatory and statutory decision making and stakeholder management, and provides support to the Chair on organisational oversight.
3.89The Commission is supported by eight committees that assist with significant regulatory, governance and management functions. For instance, ASIC has three regulatory committees, comprised of the full Commission, which makes significant decisions regarding regulatory policy, enforcement and strategicrisk.
3.90The Chair is the accountable authority of ASIC under Public Governance Performance and Accountability Act 2013. The Chair has sole executive management responsibility for ASIC’s organisational matters and relies on key ASIC executive to carry out day-to-day management and operational functions.
3.91Commissioners are independent statutory appointees, appointed by the Governor-General on the nomination of the Minister under the ASIC Act. The Chair is not subject to direction by ASIC, including the Commission. ASIC commissioners do not report to the Chair, and their appointment can only be ended by the Governor-General.
3.92ASIC is subject to a range of accountability mechanisms. These include ministerial oversight, parliamentary accountability and the preparation of public performance documents. ASIC is also subject to external scrutiny by the Financial Regulator Assessment Authority and Australian National Audit Office.
3.93ASIC’s governance arrangements are considered further in Chapter 7.
Committee comment
3.94This chapter has provided an overview of the current regulatory landscape in which ASIC operates and introduces some of the key themes that the committee will explore further in subsequent chapters of this report.
3.95The committee makes a number of observations here, which will be expanded upon in subsequent chapters.
3.96Firstly, ASIC has extensive responsibilities for corporate and financial system regulation and these responsibilities are continuing to grow. This expansive remit presents significant structural and resourcing challenges which constrain ASIC’s approach to investigation and enforcement. Secondly, while ASIC has unprecedented powers and responsibilities to enforce corporations law in Australia, these powers are underutilised and bogged in legislative complexity. And, thirdly, that budget and staffing arrangements have a significant impact on ASIC’s administration. Despite this, concerns remain about the appropriateness of ASIC’s funding and the robustness of its governance.
3.97The fact that ASIC’s remit includes entities which, by and large, make up the Australian economy and financial markets underscores the importance of getting ASIC’s regulatory settings ‘right’. Yet, the issues which have undermined ASIC’s performance have continued for so long that they have effectively become permanent features of Australia’s corporate and financial system. Reforms to address those issues are of national importance and are considered further in Chapter 8.