Chapter 5Enforcement outcomes and dispute resolution

5.1This chapter considers the approach of the Australian Securities and Investments Commission’s (ASIC) enforcement outcomes and whether those outcomes are adequate. First, the chapter considers ASIC’s enforcement powers before turning to concerns regarding enforcement rates and the suitability of sanctions. The chapter then considers ASIC’s enforcement response to issues of market integrity. The chapter concludes by considering the dispute resolution and compensation schemes which intersect with ASIC’s enforcement functions.

5.2The material in this chapter is closely related to issues regarding ASIC’s approach to investigation in Chapter 4 and should be read in conjunction with that chapter.

Introduction

5.3ASIC’s enforcement responsibilities span a wide range of misconduct, particularly under the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act).[1] Indeed, the breadth of ASIC’s role coupled with the large volume of economic activity in Australia makes enforcement a substantial, difficultundertaking.[2]

5.4ASIC’s approach to enforcement is guided by principles of responsive and strategic regulation. In general, ASIC responds to misconduct with graduated penalties and enforcement action is targeted at high-risk behaviour.[3]

5.5Following the Royal Commission, it was observed that ASIC was adopting a ‘more active’ enforcement stance.[4] However, concerns have been raised that ASIC’s commitment to ‘tougher enforcement appears to have fallen by the wayside’.[5] Further, the inquiry has received considerable evidence of serious concerns regarding the underenforcement of corporate law in Australia. This includes low rates of prosecution and inadequate penalties.

5.6Further, while the establishment of external dispute resolution and compensation schemes are important developments in providing recourse for those affected by corporate misconduct, submitters raised various concerns about the coverage and administration of those schemes.

ASIC’s significant powers to enforce corporate law

5.7Under the ASIC Act, ASIC must strive to take whatever action it can, or is necessary, to enforce the Commonwealth laws within its remit.[6] As such, appropriate powers are necessary for ASIC to enforce breaches of corporate law. Indeed, ASIC has considerable powers to enforce corporate law, including taking a range of criminal, civil and administrative actions to respond to a broad range of individual and corporate misconduct.[7]

5.8In general, inquiry participants supported ASIC having, and exercising, a diverse range of enforcement powers.[8] For example, Dr Eugene Schofield-Georgeson submitted that responding to corporate crime requires wide powers to demand production of evidence, owing to several reasons. These reasons include complex facts, difficulty of detection, and often‑indeterminate victims of corporateoffending.[9]

5.9When ASIC does use its coercive investigation powers, particularly under section 19 of the ASIC to require a person to appear for examination or compel assistance with an investigation, there is a reasonable chance of this resulting in enforcement action. For example, of the 342 cases matters in which ASIC had used its section19 powers as of 31 October 2022:

58 were currently under investigation (17 per cent);

29 had been referred to the CDPP (8 per cent);

33 had commenced criminal proceedings (10 per cent);

34 had commenced civil proceedings (10 per cent);

65 had resulted in administrative and/or court outcomes (19per cent); and

123 had ended with no further action (36 per cent).[10]

5.10Several submitters considered that ASIC’s existing powers are appropriate to perform its functions. For example, the Financial Services Committee of the Law Council of Australia (Law Council) submitted that ‘ASIC’s existing regulatory tools are appropriate to meet its statutory objectives’.[11] The Australian Institute of Company Directors (AICD) also considered that that the range of enforcement mechanisms available to ASIC are appropriate.[12] Furthermore, the Law Council highlighted that recent changes have ‘delivered ASIC with more powerful and tailored regulatory tools to prevent misconduct and reduce harm’, including design and distribution obligations and the reportable situations regime.[13]

5.11However, some submitters considered that ASIC had too many powers. For example, Chartered Accountants Australia and New Zealand suggested that ASIC’s coercive powers ‘are not effective in contributing to good market outcomes’, noting a low conversion rate between the use of these powers to gather information and the number of prosecutions commenced.[14]

5.12Other submitters considered that ASIC should have more powers. For example, multiple consumer groups argued that ASIC should have the power to give directions to financial services and credit licensees and that financial services firms should be ‘subject to stronger penalties for breaches of consumer protection provisions in the ASIC Act’.[15]

Low rates of corporate law enforcement

5.13While ASIC has substantial powers to enforce corporate law, it is clear that only a fraction of reports of alleged misconduct result in enforcement action. As a broad example, ASIC received 17 503 misconduct reports in 2022–23, however only 32 individuals were charged with criminal offences as a result of ASIC enforcement activity that year.[16]

5.14A summary of ASIC’s enforcement activities for 2022–23 are shown in Figure 5.1.

Source: ASIC, Supplementary submission 1.5, p. 8.

5.15ASIC has repeatedly sought to frame its enforcement as ‘strong’ and has firmly defended its enforcement record.[17] For instance, during the committee’s public hearing in June 2023, the Chair of ASIC argued that:

…we entirely reject assertions that ASIC is a weak corporate regulator. On the contrary, we have been and continue to be an effective litigator. Over the past three years, we’ve commenced over 125 criminal actions resulting in 92 criminal convictions and 39 custodial sentences.[18]

5.16Further, Mr Longo has emphasised that ‘ASIC is one of the nation’s most active law enforcement agencies. Amongst our domestic peers, I don’t think you will find a regulator in court more often than we are.’[19] He also emphasised that ASIC’s court action can be costly, resource-intensive, and complex.[20]

5.17However, data provided to the committee by the Commonwealth Director of Public Prosecutions (CDPP) highlights that ASIC’s referrals for serious criminal matters is in sharp decline. Indeed, there has been a 52 per cent decrease in the number of referrals ASIC made to the CDPP between 2018–19 and 2022–23, as shown below in Figure 5.2.

Source: CDPP, answers to questions on notice set 1, 24 August 2023 (received 22 September 2023).

5.18The relatively low numbers of civil and criminal matters commenced by ASIC are also cause for concern. Over the 12 years from 2011–12 to 2022–23, ASIC commenced 65 civil actions each year on average, and 30 criminal actions each year on average.[21]

5.19The annual amount of civil pecuniary penalties arising from ASIC’s enforcement activities over the last 12 years has increased significantly, rising from $30 000 in 2011–12 to $185.4 million in 2022–23.[22] By comparison, there have been modest improvements to ASIC’s criminal outcomes between 2011–12 and 2022–23, driven by increases to non-custodial sentences and fines, as seen below in Figure 5.3.

Source: Data from ASIC, Supplementary submission 1.5, p. 55.

5.20Other submitters also noted improvements in ASIC’s enforcement rates.[23]

5.21In general, ASIC’s submission shows that the number of civil actions commenced each year tends to be higher than the number of criminal actions commenced, for the period from 2011to2022.[24] Evidence from Mr Allan Fels AO, former Chair of the Australian Consumer Competition Commission (ACCC) suggests reasons that this may be the case:

The civil route is a lot easier. I'm working off ACCC, but I'm sure this applies to ASIC. If it is civil, first of all, you don't have to go through the Director of Public Prosecutions. You do the prosecution yourself and the burden of proof is quite low. It's basically balance of probabilities, not proof beyond reasonable doubt. Also, corporations don't fight that hard over civil penalties—they're just the cost of doing business—whereas, if there is a criminal case, very often massive resources will go into the defence and they'll fight at every stage of the process.[25]

5.22Further, Mr Fels argued that ‘parliament has made a lot of offences criminal and the law enforcers should follow that through in cases. If they happen to lose, we can go back to parliament and ask for some help’.[26]

Concerns regarding the ASIC’s low rate of enforcement action

5.23Given ASIC’s low rate of enforcement action, several inquiry participants called into question ASIC’s capacity to appropriately enforce corporate law.

5.24For example, Mr Fels told the committee that ASIC has ‘always had a very poor enforcement culture’ due, in part, to the Chair of ASIC having a background in big corporate law which is ‘not close to the culture that's required for law enforcement’.[27] In particular, Mr Fels sharply criticised ASIC for selectively enforcing the laws within its remit:

…parliament has passed a law and it says that if you break the law you should suffer sanctions, such as fines and other things. When a matter comes to the attention of ASIC or the ACCC, it shouldn't look up an economic calculus of cost-benefit blah, blah. It should say, 'Someone has broken the law and our job is to get a court remedy,' by and large. It may be that it can't manage it all, so it cuts back on some of the lesser cases and things like that. But, on the whole, as these things arrive on your desk, you just say, 'We've got to enforce the law. We'll do our best. It may stretch our resources, but we'll do our best.'

I contrast that with a kind of resource allocation approach, which says, 'Oh, well, there's a law and we've got limited time and resources, so we're not going to enforce it all; we'll just get what we think is the best bang for the buck.' By the way, that calculus also has its own problems because often it's easy to win small cases and, if that's part of your mathematics, it tends to stop you going in on the tough things. I say that if there's any serious breach of the law, the regulator has to go in and take court action about it, rather than starting to worry about efficient resource allocation within the agency.

5.25Further, Associate Professor Andy Schmulow of the University of Wollongong’s School of Law argued that ASIC’s approach of selectively enforcing the law does a disservice to the consumers such laws are designed to protect:

ASIC is not a traffic controller. ASIC's job is not to stand on a highway, directing traffic and saying, 'Let this stream come through and we'll hold this one so that we can have optimal traffic flow.' ASIC's job is to enforce the law, not to be a traffic controller. …consumers must accept risk. They do accept risk. What they don't accept is fraud and theft. When you charge dead people for financial advice or charge people who you know to be dead life insurance premiums, that's not risk; that's fraud and theft.[28]

5.26A number of submitters raised concerns about ASIC’s low rate of corporate law enforcement. For example, the Small Business Development Commission (SBDC), an independent statutory authority of the Government of Western Australia, expressed the view that ‘significantly larger number of investigations and prosecutions should be undertaken by ASIC to penalise effectively those who deliberately engage in misconduct’.[29] Further, the SBDC commented that an increased rate of enforcement activity, including high-profile prosecutions, would act as a deterrent to corporate crime.[30]

5.27Further, the committee received evidence that ASIC rarely takes criminal enforcement action against corporate actors, preferring instead to take criminal proceedings against individuals for instances of reported misconduct. In its 2020 report, Corporate Criminal Responsibility, the ALRC observed that only five per cent of criminal proceedings brought under ASIC-enforced legislation that are publicly reported involve corporate defendants.[31] In response to questioning about how ASIC decides whether to pursue a civil penalty or criminal sanction, Ms Sarah Court, Deputy Chair of ASIC, replied:

ASIC frequently takes civil proceedings against corporate entities. We take criminal proceedings against individuals, and, on some occasions, corporate entities, where we have the evidence that will meet the criminal threshold … Our role as a public enforcement agency is to take enforcement action that sends both specific deterrence to the company involved and general deterrence to the industry.[32]

5.28Inquiry participants expressed concerns that corporations can commit corporate crime on a much larger scale than individuals. These submitters emphasised the need to prosecute all instances of corporate crime, whether they are committed at the individual or corporate level. Ms Caroline Read stated that ASIC must be provided with sufficient enforcement powers to take criminal action against every instance of corporate crime.[33] These inquiry participants also contended that corporations can more easily avoid accountability for corporate crime than individuals due to their size and considerable resources. Mr William O’Chee, Partner at Himalaya Consulting, expanded on this point in his evidence to the committee:

If I were a criminal, I know I could get away with a lot more using a company than I could by defrauding under my own name, because you create a buffer between yourself and your offences. It makes it very easy to lose the records. But, more importantly, you can get more victims quicker and in much greater amounts. So we now have to say, 'All right, we have massive financial crimes involving corporations. It is now time to stop treating these criminals as gentlemen who should be given special treatment under the Corporations Act and instead treat them as the financial criminals they are and have them investigated by the AFP'.[34]

Poorly correlated enforcement action and inadequate penalties

5.29ASIC’s enforcement actions do not adequately reflect the seriousness of the crimes it seeks to police and do not act as a deterrent to corporate criminals inAustralia.

5.30In its submission to the inquiry, Maurice Blackburn Lawyers noted the importance of tailoring enforcement to handle both organisational and individual wrongdoing:

Without an objective standard of liability, profitable but unlawful conduct can persist as a result of flawed management and information systems, such that wrongdoing is either quarantined to low levels within the organisation or in effect distributed among individuals. Companies which tolerate or fail to detect misconduct without bearing the costs of doing so can thereby avoid being penalised and obtain a competitive advantage over those which take active steps to prevent it.[35]

5.31In evidence to the inquiry, Associate Professor Schmulow cited long-term research into the prosecutions under corporate law in Australia. This research indicated that in the 10-year period of the study there were 715 cases and 1427 criminal offences prosecuted under the Corporations Act and the ASIC Act. These 715 cases were brought under only 86 unique sections of both the Corporations Act and the ASIC Act, despite there being over 900 sections available across both Acts.[36]

5.32Associate Professor Schmulow attributed this statistic to a lack of expertise in corporate law for both the Commonwealth Director of Public Prosecutions (CDPP) and ASIC:

…I think we can conclude that the CDPP is under-resourced when it comes to expertise in the Corporations Act and the ASIC Act, but so is ASIC. Mr Justice Perram, in ASIC v Westpac, said that ASIC doesn't understand or know the law. So, between ASIC and the CDPP, you've got two organisations that are across 86 out of 900 sections, with those 86 being the easiest sections to prove because they're administrative. The other 814 they don't want to touch because it's too difficult, they're too conservative and they don't want to lose.[37]

5.33These views were echoed by Mr John Winter of the Australian Restructuring, Insolvency and Turnaround Association:

My team and I lament the ASIC press releases that show the all-too-infrequent successful prosecutions against directors and the frankly laughable penalties that are often imposed by the court, penalties that show occasionally being found out is a small cost of doing business compared to the windfall of ill-gotten gains.[38]

5.34The fact that misconduct was seen by certain industry actors as the cost of doing business was roundly criticised during the Royal Commission and contributed to ASIC adopting its so-called ‘why not litigate’ strategy.[39]

5.35However, other submitters took a different view, arguing penalties imposed for misconduct were sometimes excessive. The Institute of Public Affairs (IPA) stated that white collar criminals should not be imprisoned but should suffer financial penalty. The IPA questioned the public benefit of ASIC’s enforcement actions, particularly in high profile cases, and provided evidence that a more effective means of preventing crime is the likelihood someone will be apprehended rather than a particular penalty being in place.[40]

5.36The Small Business Development Corporation, while in favour of ASIC undertaking more prosecutions of those who deliberately engage in misconduct, also provided the views of small business owners who felt that the bar of compliance with the Corporations Act was too high and financial penalties for minor infractions were often highly onerous.[41]

5.37The Law Council also raised concerns about ASIC’s actions against small businesses, noting ASIC’s use of infringement notices and how the costs of contesting such a notice in Court was often too high for a small business to undertake. It also noted the reputational costs of such a notice being issued against a small business, which were often more onerous than the infringement notice itself.[42]

5.38The Law Council stated it would ‘welcome’ non-litigious dispute resolution outcomes:

…these represent a more tailored and efficient dispute resolution method for responding to actual or suspected breach of the laws that ASIC oversees. The FS Committee believes that, unlike litigation, the use of court enforceable undertakings gives ASIC the ability to shape and monitor aspects of firms’ behaviour and serves as a more tailored and facilitative enforcement process than the blunt and very costly instrument of litigation. The FS Committee also notes that, in litigious matters, it can sometimes take several years between the time when the offending conduct occurs and the final court outcome.[43]

5.39The AICD, while noting the importance of deterrence, also argued that an overly blunt approach to enforcement may discourage self-reporting and cooperation by regulated entities. It advocated for negotiated outcomes, and argued that enforceable undertakings could be an effective regulatory tool, noting their cost and time efficiency and that these undertakings often resulted in improved compliance.[44]

5.40In relation to the contracts-for-difference and margin foreign exchange markets, CISA Consulting submitted that this market was overregulated. CISA Consulting argued that ASIC was overly focused on the market as a whole rather than on bad actors, and this was leading to limited freedom of choice for investors.[45]

Dixon Advisory

5.41As outlined in the executive summary, the committee received concerning evidence regarding ASIC’s response to Dixon Advisory. ASIC instituted civil action against Dixon Advisory, and a fine of $7.2million was imposed. ASIC and Dixon Advisory agreed that the aggregate penalty of $7.2 million was appropriate in the circumstances.[46] This outcome stands in contrast to the outcome of a class action against Dixon Advisory resulting in a settlement, where the court ordered that more than double this amount, no less than $16 million, be paid to claimants. The judge noted that the likely return for the claimants is ‘already very small compared to the losses which [the claimants] have sustained’.[47] Despite this, no criminal action was pursued against Dixon Advisory.

5.42Additionally, ASIC did not take action against numerous, previous directors of Dixon Advisory, who were ultimately subject to neither civil nor criminal prosecution. ASIC identified that a majority of complaints made regarding Dixon Advisory raised concerns about the advice provided by authorised representatives,[48] but nevertheless ASIC focused on systematic issues involving the business model. ASIC considered the appropriate response was to take action against the company, and further disclosed that no formal ASIC investigations focused on advisers with Dixon Advisory.[49]

Timeliness of enforcement action

5.43The enforcement of corporate and financial services regulation must be timely for it to be effective.

5.44In 2022–23, it took ASIC an average of five years to complete an investigation into instances of reported misconduct andfor that misconduct to be resolved by the courts.[50] Therefore, based on ASIC’s own numbers, it takes the regulator a period of five years after becoming aware of alleged misconduct to conclude its enforcement action.[51] The timeliness of ASIC’s enforcement action has deteriorated significantly since 2021–22, with delays increasing by 16 months on average. In 2021–22, it took the regulator an average of 44 months to complete an investigation into alleged misconduct and for that misconduct to be resolved by the courts.[52]

5.45When misconduct occurs in the corporate and financial services industry, it is essential that individuals harmed by this misconduct have confidence that the regulator will take swift and appropriate enforcement action. However, inquiry participants have expressed strong concerns that delays in ASIC’s enforcement action have damaged public confidence in the regulator and enhanced the harms of corporate misconduct.[53]

5.46In its submission, Chartered Accountants Australia and New Zealand (CAANZ) referenced ASIC’s investigation of Mr Rudolph Karel.[54] In December 2022, ASIC announced that Mr Karel had been disqualified from managing corporations for five years. However, this enforcement action was in response to misconduct occurring over 18 years from January 2000 to February 2018, when the misconduct was first reported to ASIC. Until the enforcement action was completed in December 2022, Mr Karel continued to run his businesses uninterrupted.[55] CAANZ warned that similar delays in enforcement action allow company directors to continue and benefit from their misconduct despite that misconduct being identified and reported.[56]

5.47The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) expressed concerns about the volume of reports of misconduct that do not see any investigation or enforcement action. The ASBFEO highlighted the economic impacts of unchecked misconduct and the costs to business and their creditors.[57] In doing so, the ASBFEO referred to the Viewble Media case, in which over 1000 instances of potential misconduct were referred to ASIC. However, due to delays in ASIC’s enforcement action, the misconduct went unaddressed for longer, compounding the harms to affected small businesses and consumers.[58] These concerns were echoed by the Australian Banking Association (ABA). The ABA submitted that unresolved matters which are left unactioned by the regulator damage consumer confidence and can create uncertainty in the industry as misconduct in the industry goes unaddressed.[59]

5.48Several inquiry participants recommended that ASIC’s resourcing be increased to reduce delays in enforcement actions. The Financial Services Council (FSC) submitted that ASIC should have the resources to bring timely enforcement proceedings.[60] The ABA recommended that ASIC enhance its data and digital capabilities to better identify and act on potential misconduct, as well as engaging in better targeted dialogues with the industry.[61]

Concerns regarding ASIC’s ability to enforce market integrity

5.49Strong investigation and enforcement measures are needed to ensure that investors maintain confidence in the integrity of financial markets. According to ASIC, misconduct which ‘damages market integrity, including insider trading, is an enduring enforcement priority’.[62]

5.50However, the committee received evidence of instances where multiple, concurrent forms of misconduct that undermine the integrity of Australia’s markets are routinely going undetected and unpunished.

5.51Section 1043A of the Corporations Act prohibits a person who possesses inside information from trading in relevant financial products, or procuring another person to do so on their behalf.[63] Further, a person is prohibited from communicating inside information to another person where they anticipate that the person would trade in a relevant financial product, or procure a third party to do so.[64]

5.52ASIC has recognised the significant adverse impacts insider trading can have on Australian markets:

Insider trading can impact investor returns, can increase the cost of capital for Australian businesses and perpetuate the notion that markets are rigged in favour of those with privileged access to inside information. Left unchecked, it can damage Australia’s reputation as a regional financial hub.[65]

5.53However, ASIC argued that it has a ‘strong track record of enforcing insider trading laws and evidence shows Australia is one of the cleanest markets’.[66] Yet, ASIC’s own data suggests that only a small proportion of alerts or reports of potential insider trading lead to investigation by ASIC and an even smaller number of reports result in prosecution and conviction. For example, from 2019–20 to 2021–22:

ASIC received and reviewed 136 997 insider trading surveillance alerts;

ASIC received 245 reports from brokers on suspicious trading activity;

ASIC commenced 36 investigations into insider trading;

the CDPP commenced 7 prosecutions against people or companies charged with insider trading (with a total of 32 charges laid); and

six people or companies were convicted of insider trading offences.[67]

5.54In its submission, ASIC described insider trading as ‘hard to detect due to the nature of the suspicious trading patterns, information passing through personal relationships and technology increasingly facilitating unrecorded communications’. Further, ASIC noted that insider trading cases are ‘complex’, and involve the use of independent experts, securing challenging evidence and the execution of search warrants.[68]

5.55Through analysis of data from the CDPP, Dr George Gilligan and ProfessorIanRamsay AO identified that, where a defendant was alleged to have contravened section 1043A and pleaded not guilty, the prosecution had a relatively low rate of successfully proving the charge, with only 27.3 per cent of charges being proven.[69]

5.56As noted in the Financial Services Council’s (FSC) submission to the inquiry, ASIC recently investigated investment switches made by a number of superannuation fund executives in connection with possible charges for insider trading.However, the FSC said that while it became clear that the executives’ conduct did not technically breach insider trading laws, it ‘did raise serious concerns about how trustees manage conflicts of interest and could constitute breaches of other financial services laws’.[70] As such, the FSC recommended that the government ‘implements law reform to address the issue of investment switching by superannuation trustees on the basis of essentially information price-sensitive information known to them (but not publicly available).’[71]

5.57Concerningly, some inquiry participants contended that insider trading is a common issue affecting the integrity of Australia’s primary securities exchange, the ASX. For example, Mr Lachlan Walden, an ASX investor and trader, submitted that:

A very conservative estimate would be that at least $500 million annually is wrongly transferred from investors in small ASX companies to criminals that flagrantly break the law. Despite my best efforts to report to ASIC blatant illegal market manipulation, fraudulent upcoming IPOs and clear instances of insider trading, there seems to have been no tangible enforcement action taken on any matter. My confidence in the regulator to uphold the law and its own ASIC Market Integrity Rules is now severely lacking.[72]

5.58Concerns regarding the integrity of market sensitive information of small companies on the ASIC were also raised by MrTravis Peluso:

…it also sits within that small cap type of company, where they don't have hundreds of people. They're small companies. There might be five, 10 or 15 employees. They are ASX listed. A flow of information goes from those organisations into retail investors and some institutions. I think there's certainly a lot of challenges in that small cap space. When you've got an employee who provides this type of information and then there's other employees and directors prepared to give information, that's when I find the process that I went through and the mechanisms of investigation within ASIC certainly failed on this occasion.

5.59Furthermore, Mr Walden submitted that various forms of unlawful conduct are ‘endemic on the ASX’ and almost never detected by ASIC, including:

insider trading when directors and/or management resign with negative price-sensitive information;

insider trading on material positive news where the nature and/or timing of announcements is leaked in advance;

insider trading around capital raisings where large shareholders are made aware in advance and sell their existing holdings at a premium;

manipulation of closing share prices on a recurring basis;

market manipulation by traders using sophisticated ‘spoofing’ techniques;

non-disclosure of material negative news over a prolonged period;

non-disclosure of material changes to previous positive announcements;

investor and trader syndicate ‘pump and dump’ schemes;

breaches of directors’ statutory duties whereby company insiders collude to award themselves equity or loan company funds to directors;

breaches of directors’ statutory duties whereby an acquisition takes place from a related entity on non-commercial or unreasonable terms;

non-disclosure of directors’ interests where shares are held in entities controlled by directors; and

non-disclosure by substantial shareholders of legally mandated notification of changes in interest over extended time periods.[73]

5.60Further, Mr Walden contended that ASIC is ‘entirely incompetent at enforcing’ market rules and pointed to causes for this beyond a ‘lack of resourcing’.MrWalden suggested that ASIC lacks market professionals with high-level trading knowledge and that ASIC’s filters for insider trading surveillance are ‘ineffective’.[74]

5.61In its submission to the FRAA’s review of ASIC, the Business Council of Australia said that while ASIC’s market surveillance function is ‘technically sophisticated, and technically capable,’ it considered ASIC investigators required ‘greater market experience and understanding to interpret trading activity undertaken by professional portfolio managers’.[75]

Breaches of continuous disclosure requirements

5.62Continuous disclosure requirements are a fundamental component of market integrity. In general, Australia’s continuous disclosure laws require that an entity disclose ‘information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities on a continual basis and in a timely manner’.[76] Such requirements promote equal access to information so that trading on markets is done in a fair and transparent manner.

5.63Submissions to the inquiry focussed on this important issue. For example, the AICD questioned why private legal actions are needed to enforce continuous disclosure laws when ‘ASIC already has significant enforcement powers’.[77] Despite these powers, the AICD submitted that ASIC’s enforcement of continuous disclosure matters, between 2018 and 2022, resulted in eight civil actions, seven administrative remedies and zero criminal actions. The AICD considered that this result reflected a:

…relatively low number of civil actions when compared with the volume of securities class actions over the same period, suggesting a disconnect between public and private enforcement.[78]

5.64Madgwicks, in their submission, identified a matter in which an unnamed company appeared to have failed to comply with its continuous disclosure obligations. Madgwicks outlined that significant time, effort and cost had been expended by investors in reporting this suspected misconduct to ASIC, and that ASIC has not confirmed whether it is investigating or taking action in the matter.[79]

5.65In Box 5.1, the committee evidence regarding the Nuix IPO indicates there were multiple issues that undermined market integrity, including breaches of continuous disclosure requirements, insider trading and governance issues.

ASIC’s enforcement of directors’ duties

5.66The Corporations Act sets out the statutory duties and powers of directors of Australian Companies, as well as the duties of other officers. These duties are:

the duty to exercise reasonable care and diligence (subsection 180(1) of Corporations Act);

the duty to act in good faith (section 181 of the Corporations Act);

the duty not to improperly use position or information to gain an advantage or cause detriment to the company (section 182 of the Corporations Act);

the duty to prevent insolvent trading (section s588G of the Corporations Act);

the duty to avoid conflicts of interest (sections 191, 208 and 205G of the Corporations Act);

statutory duties in relation to financial record keeping and reporting (section 344 of the Corporations Act); and

statutory duties in relation to specific areas of law such as financial services, consumer law, workplace health and safety law and environmental legislation (various pieces of legislation at the state and federal level).[90]

5.67Contravention of these duties can result in criminal or civil sanctions or disqualification as a director.[91] As the body that administers the Corporations Act, ASIC has a role in regulating directors conduct and enforcing breaches of director’s duties.

5.68Submitters raised concerns about the ASIC’s role regulating directors, with the Australian Restructuring Insolvency and Turnaround Association (ARITA) noting that there was a ‘virtual absence of enforcement action against directors for breaches of directors’ duties, insolvent trading or any other misconduct that results in or is related to the failure of a company.’[92] Mr John Winter, Chief Executive Officer of ARITA, reinforced this at a public hearing:

Indeed, look at the number of times we see prosecutions around directors being responsible for a number of failing companies. Again, you see that pattern. If you have a number of failed companies, you are engaged in either gross incompetence or some type of fraudulent behaviour. At best, they'll get a director banning notice and generally a fine of $5,000 to $10,000 even though they might have absconded with a quarter of a million dollars plus worth of tax.[93]

5.69The committee also received several submissions from people who outline circumstances in which apparent breaches of directors have been subject to limited, if any, enforcement action by ASIC.[94]

5.70Several submissions, including ARITA’s, noted the need for education around directors’ duties and noted the success of the National Insolvency Trading Program which had been run by ASIC from 2005 to 2010.[95] This program visited over 1500 companies for the period it was active and:

provided awareness of directors’ duties and the expectations of professional advisors for companies facing financial difficulties;

encouraged directors to seek advice when significant insolvency indicators were present in their company from insolvency professionals;[96] and

improved directors’ knowledge about their options for insolvency, such as restructuring pathways, allowing these directors to save their business.[97]

5.71The ASBFEO recommended that the National Insolvency Trading Program, or something similar, be funded by government to support small businesses:

Such a program would provide a viability service to improve businesses’ financial acumen, forward planning skills, and understanding of insolvency processes. It would also provide an opportunity to identify cash flow or other problems early and provide tools to remedy them, such as through restructuring, which may avoid an insolvency. This would free up ASIC’s investigative and enforcement resources to focus on reports of serious or intentional misconduct.[98]

5.72Other evidence to the committee commented on ASIC’s introduction of the Director ID System. This is a unique identifier ‘which will help prevent the use of false or fraudulent director identities’.[99] The Small Business Development Corporation (SBDC) was very supportive of the introduction of this system, noting that it would help reduce director involvement in illegal phoenixing.[100]

Illegal phoenix activity

5.73The concerns raised by registered liquidators appear to be reflected in ASIC’s data on administrative and criminal outcomes related to illegal phoenix activity. Between 2015–16 and 2021–22, ASIC achieved a median of seven administrative actions actions/outcomes each year in relation to illegal phoenix activity. The vast majority of these actions/outcomes were related to director disqualification.[101] Further, between 2017–18 and 2021–22, ASIC achieved a median of 4 criminal actions actions/outcomes each year in relation to illegal phoenix activity.[102]

5.74Between 2019–20 and 2021–22, ASIC commenced 124 surveillances relating to potential illegal phoenix activity. ASIC completed 121 surveillances.[103] In that same period, ASIC:

commenced 33 new investigations in relation to illegal phoenix activity;

achieved 23 administrative outcomes; and

achieved 9 criminal outcomes through the CDPP.[104]

5.75Further, ASIC stated:

As a result of our investigations, 22 persons were disqualified from managing companies, one registered liquidator had conditions imposed on their registration, and 9 people were convicted of criminal offences relating to illegal phoenix activity…[105]

5.76ARITA states that ASIC does regulate phoenixing activity and that this work is now being led by the Australian Taxation Office (ATO). However, ARITA argues that ASIC should be involved given that ASIC’s regulatory remit includes director conduct.

Complexity of corporate law and corporate criminal responsibility

5.77The significant complexity of corporate law adds to the regulatory burden of enforcing and complying with corporations and financial services law. In its 2020 report, Corporate Criminal Responsibility, the Australian Law Reform Commission (ALRC), identified over 3100 offences across 25 identified statutes applicable to corporations. The ALRC concluded that these offences are opaque as currently drafted and that the volume of these offences obscures their collective rationale.[106]

5.78The ALRC also observed that the prosecution of corporations in Australia is ‘extremely rare’, with only one per cent of finalised appearances in criminal courts involving corporate actors.[107] Further, only five per cent of criminal proceedings brought under ASIC-enforced legislation that are publicly reported involve corporate defendants.[108] This is despite the findings of the Royal Commission, which concluded that corporations do commit crimes, often attracting significant individual and social harms.[109] The low rate of corporate prosecutions is also in conflict with the large volume of criminal offences applicable to corporations.

5.79The ALRC found that Commonwealth corporate criminal law is characterised by excessive complexity and specificity. The offences applying to corporations also vary widely in their severity and the size of the penalties they impose.

5.80Australian corporate law provides ASIC with the power to notionally amend the Corporations Act to provide actors or classes of actors with exclusions and exemptions from provisions of the principal legislation. ASIC can impose conditions on the grant of these exclusions and exemptions, essentially creating de facto legislative schemes. These notional amendment powers provide ASIC with the flexibility to regulate around a highly prescriptive principal legislative framework.[110]

5.81However, in its November 2021 report, Financial Services Legislation: Interim Report A, the ALRC concluded that ASIC’s notional amendment powers have contributed to the complexity of Australian corporate law. The ALRC stated that these powers have made corporate regulation unnavigable, opaque, incoherent and unknowable.[111] ASIC’s notional amendments do not appear on the face of the Corporations Act, nor are they exercised in accordance with established and known principles, creating a sporadic and disjointed regulatory framework.[112] The ALRC expressed concerns that the exercise of these powers has limited the accessibility of the law for industry participants.[113] These concern are consistent with the findings of the Hon Kenneth Hayne AC KC, in his role as Royal Commissioner:

… much of the complication [of the current regulatory regime] comes from piling exception upon exception, from carving out special rules for special interests. And, in almost every case, these special rules qualify the application of a more general principle to entities or transactions that are not different in any material way from those to which the general rule is applied.[114]

5.82Inquiry participants expressed concerns about the complexity of corporate law and the resulting regulatory burden on industry participants and the regulator itself. The Institute of Public Accountants contended that ASIC presides over ‘impenetrable’ legislation and that this places the regulator under considerable pressure. Accordingly, the Institute of Public Accountants recommended that the government consider the recommendations of the ALRC to simplify the corporate law.[115] The Law Council also expressed strong support for measures to simplify and streamline the Corporations Act, particularly regarding provisions relating to financial services and markets.[116]

5.83Further, ARITA submitted that the corporate law must be understandable and accessible to those seeking to comply with it.[117] These concerns were echoed by the Association of Financial Advisers (AFA) which submitted that deterring poor behaviour in the financial services sector is made more difficult by an unnecessarily complex legislative and regulatory framework.[118]

Other issues raised in evidence

5.84ASIC’s powers to remedy director misconduct without obtaining court orders are limited. Under section 206F of the Corporations Act, ASIC may only disqualify directors for a period of up to five years, even where a director has engaged in repeated misconduct that risks, or has caused, significant harm to consumers or investors.

5.85Some submitters considered that ASIC was overly harsh when pursuing enforcement outcomes.

5.86The AFA believed that media coverage of the Royal Commission caused market distortion and the ‘very poor outcome’ of ASIC adopting a ‘why not litigate’ operation model, where litigation is sometimes less preferable compared to the other regulatory tools available to ASIC.[119] On the basis that there is a reduction in financial adviser numbers, the AFA expected ASIC staff numbers to have fallen, noting that financial advisers end up paying for some enforcement activity.[120]

5.87The AFA disclosed that the financial advice sector has complained about ASIC’s approach to enforcement. The AFA has stated that ASIC has set rules for the financial services industry through regulatory guidance and information sheets, that doing this was not always within ASIC’s power, and that these guidance and information documents have received unwarranted emphasis in both ASIC’s investigation and enforcement activity.[121]

5.88ARITA did not view ASIC as successfully achieving enforcement outcomes, describing ASIC as taking an ‘intensive approach’ to the regulation of liquidators, with few successful disciplinary actions being undertaken in recent years. They also stated that ’ASIC only achieves limited successful outcomes’ against company directors.[122]

5.89On the other hand, some inquiry participants considered that ASIC did not pursue enforcement outcomes forcefully enough. For example, Mr Peter Keenan stated that insolvency practitioners, lawyers and academics have criticised the inadequacy of ASIC’s enforcement action. Mr Keenan recounted his personal experience as a liquidator, including an instance where he reported that criminal offences may have been committed by individuals in relation to a company. Mr Keenan described perceived reluctance by ASIC employees and managers to take enforcement action, and that ultimately no action was taken.[123]

5.90Submitters also pointed to issues in ASIC’s reporting of its enforcement action, namely that reporting was inconsistent, potentially obfuscated, and did not include all useful information that could have been included.

5.91Dr Jason Harris, in his submission, discussed the inconsistency in ASIC’s transparency and accountability. He pointed to ASIC’s approach to enforcement activity, focusing on case studies but not detail on its enforcement activities, making it impossible to track ASIC’s actions over several years. He asserted that this is compounded by the difficulty of accessing information through ASIC’swebsite.[124]

5.92This view was shared by Dr Marina Nehme, who unequivocally stated that ASIC needs to improve its reporting on enforcement matters, improving the detail and depth of what is currently mediocre reporting, with contradictions between different reports.[125]

5.93AFA believed that there needs to be an appeal channel or ombudsman for those who are subject to ASIC investigation action that they consider to be ineffective orexcessive.[126]

Dispute resolution and compensation schemes

5.94Submitters noted the importance of an effective dispute resolution scheme as a mechanism to provide timely outcomes for parties to a dispute.[127] Both ASIC and the Australian Financial Complaints Authority (AFCA) recognised that effective dispute resolution and compensation schemes complemented regulatory action in protecting consumers from wrongdoing in the financial sector.[128]

5.95Where alleged misconduct in the financial industry does not become subject to regulatory or enforcement action, the effective functioning of dispute resolution and compensation schemes is important for ensuring that consumers can access redress for financial harm.

External dispute resolution scheme for the financial sector

5.96Regulatory schemes applicable to financial firms establish obligations concerning internal dispute resolution. Individuals raising complaints can use internal dispute resolution in the first instance to attempt to resolve disputes. AFCA is responsible for operating the external dispute resolution (EDR) system, to be used when disputes are not resolved through internal dispute resolution.

5.97In the EDR system, AFCA receives financial complaints from individuals and seeks to resolve disputes through a range of methods. While AFCA operates this system, ASIC is empowered to issue a variety of directions to AFCA under the Corporations Act,[129] and it is ultimately ASIC that is responsible for regulating the consumer protection system. AFCA is subject to obligations to report to ASIC under the Corporations Act and regulatory guidance issued by ASIC.[130]

5.98ASIC identified that, for 2021–22, AFCA received 72 358 complaints, reporting 67 systemic issues and 23 contraventions to regulators.[131]

5.99The AFCA Rules, approved by ASIC, explain the process for parties who are dissatisfied with AFCA’s handling of the dispute resolution process, including possible escalation to consideration of the process by an IndependentAssessor.[132]

Jurisdiction of AFCA

5.100Only eligible people, as defined in the AFCA rules,[133] may bring a dispute to AFCA for resolution. The counterparty to the dispute must be a member ofAFCA.[134]

5.101Certain entities which hold an Australian Financial Services (AFS) licence must be a member of AFCA, as a requirement of that AFS licence. ASIC Pro Forma 209 (PF 209) sets out standard AFS licence conditions,[135] which include external dispute resolution requirements.

5.102PF 209 requires licensees that provide financial services to retail clients to be a member of AFCA.[136] Eligible people may bring disputes against such licensees to AFCA for consideration.

5.103While it appears that not every AFS licensee is required to be a member of AFCA, licensees may still voluntarily become an AFCA member and become subject to dispute resolution processes through AFCA.

5.104Some entities are not required to become an AFCA member, and do not voluntarily join AFCA as a member. Individuals are unable to bring disputes against such entities to AFCA.[137]

5.105The consumer groups which made a joint submission to this inquiry identified that EDR is often unavailable because membership of AFCA is only required of licence holders.[138] These submitters highlighted that these unlicenced entities are the very entities that often cause the most harm to consumers from blatant disregard for the law,[139] yet AFCA does not provide dispute resolution for individuals aggrieved by these entities.

Dissatisfaction with external dispute resolution

5.106Several submitters raised concerns about AFCA’s administration of the EDR scheme. For example, the Australian Citizens Party referenced various submissions to parliamentary inquiries which, in turn, have expressed concerns that AFCA has been captured by industry and makes biased and unfair determinations. The Australian Citizens Party further asserted that AFCA is resistant to review and has been subject to reports alleging that it ignores evidence of serious financial crimes.[140]

5.107The Financial Services Council expressed concern that AFCA ‘is not able to consistently meet its obligations in providing a fair, efficient, timely and independent dispute resolution scheme to all parties’.[141] In particular, the FSC submitted that AFCA:

should not compensate consumers for an unsuccessful financial investment where the financial business has acted within the law;

should remain cognisant that its role is to resolve disputes, not to make or administer law or policy;

should adhere to a number of key principles; and

should be subject to increased accountability mechanisms.[142]

5.108A number of individual submitters to this inquiry relayed their negative experiences with AFCA, and argued that that AFCA does not provide appropriate mediation services.[143]

Compensation for affected individuals

5.109AFCA provides dispute resolution, and can decide that a financial firm should compensate a complainant for financial loss.[144] ASIC noted that, as a result of 2019 reforms, firms that do not pay compensation in accordance with AFCA determinations can be subject to significant civil penalties. ASIC also identified that the compensation scheme of last resort (CSLR) was introduced to respond to unpaid consumer compensation awards typically as a result of firminsolvency.[145]

5.110Where ASIC brings civil action, it may secure compensation on behalf of those impacted by alleged misconduct,[146] but it does not seek compensation as a matter of course.[147] Ms Sarah Court, ASIC Deputy Chair, acknowledged that investors are ‘frequently left out of pocket by conduct that contravenes the Corporations Act’.[148] However, Ms Court claimed that it was not ASIC’s role to seek compensation for individual consumers:

We don't, as a matter of course, in our civil proceedings, seek compensation for individuals impacted. We do from time to time, but we don't as a matter of course. We're not resourced to do so. Our role as a public enforcement agency is to take enforcement action that sends both specific deterrence to the company involved and general deterrence to the industry…[149]

5.111Maurice Blackburn argued that financial markets are characterised by information asymmetry and moral hazard which risks market failure and misconduct, as demonstrated by the Royal Commission. They argued that compensation payments are necessary to ensure that the ‘costs of wrongdoing are internalised by the wrongdoers, rather than visited upon innocent marketparticipants’.[150]

5.112Maurice Blackburn also identified that ‘the maximum penalties available to ASIC pale in comparison to the quantum of the damage caused by misconduct’.[151] This suggests that even if ASIC were to pursue compensation for individuals through civil action as a matter of course, these steps would likely be insufficient to provide adequate redress for those who have suffered loss.

5.113With neither ASIC’s regulatory conduct nor AFCA’s financial industry dispute resolution reliably providing compensation to individuals who have suffered harm, identifying, preventing, and responding appropriately to misconduct is all the more important to ensure innocent individuals are not left out of pocket as a result ofmisconduct.

Compensation Scheme of Last Resort

5.114In June 2023, the Parliament passed legislation to establish the CSLR. The CSLR was established following a recommendation of the 2017 Ramsay review.[152] The CSLR commenced operations on 2 April 2024.

5.115The CSLR ‘can pay compensation to eligible people suffering from financial misconduct. Compensation payments of up to $150,000 can be made’. The CSLR is funded through an industry levy and is likely to be drawn upon when an ‘offending financial firm has ceased trading or becomeinsolvent’.[153]

5.116ASIC identified that the CSLR is intended to provide public benefit by ensuring that customers affected by financial firm misconduct receive the compensation they have been awarded.[154]

5.117In November 2023, AFCA advised the committee that there had been approximately 5000 cases across 50 financial firms affected by insolvency that had been paused prior to the introduction of the CSLR, which were subsequently being processed by AFCA.[155]

5.118Some have long expressed views that compensation schemes such as the CSLR are unfair as they give rise to moral hazard.[156] A review by Richard St. John in 2012 stated that such compensation schemes can potentially lead to reducing incentives for stringent regulation or rigorous administration of compensation arrangements.[157]

5.119Participants in this inquiry have also expressed concerns about the moral hazard from the current CSLR. Participants have cautioned against organisations that did not engage in an instance of wrongdoing being required to compensate individuals who are harmed by the misconduct of other wrongdoers.

5.120The Financial Services Council argued against the CSLR on the basis of moral hazard. They stated that the CSLR must not be used in a way that makes those with more resources and who have not engaged in wrongdoing fund the wrongdoings of those who have been poorly or inadequately resourced. They argued that without greater ASIC oversight and enforcement, these CSLR scheme shifts the cost of harms to companies who have done nothing wrong.[158]

5.121Financial Services Australia argued that, without better oversight and enforcement of existing laws, the CSLR will ‘do little to reduce the consumer risk of unpaid AFCA determinations and simply shifts the cost, via levies, to financial services companies that have done nothing wrong’.[159]

5.122The Financial Planning Association of Australia criticised the CSLR on the basis that it was limited to contributions from product distributors and financial planners, and that AFCA determination statistics indicate few complaints related to financial planners. Data indicated that only 25 per cent of such complaints in a particular half year period were resolved in favour of thecomplainants.[160]

Compensation for Detriment due to Defective Administration Scheme

5.123Some submitters have argued that, in certain circumstances in which individuals suffer harm as a result of corporate misconduct, ASIC should compensate those individuals under the Compensation for Detriment due to Defective Administration (CDDA) Scheme. Whether ASIC may or ought to make payments to aggrieved individuals under the CDDA Scheme is a topic that has been raised in evidence and explored in a previous committee inquiry.[161]

5.124The CDDA Scheme provides a mechanism for a Non-Corporate Commonwealth Entity to compensate people who have experienced detriment as a result of that entity’s defective administration.[162] Payments made under the CDDA Scheme are not subject to time limits or a cap on compensation, and are made on a discretionary, not mandatory, basis.[163]

5.125Some inquiry participants have argued that individuals who experience losses from corporate misconduct have experienced those losses in the context of deficient or insufficient enforcement action by ASIC, and that ASIC should therefore provide compensation for these losses.

5.126Evidence provided to the committee indicates that ASIC has previously received and processed claims under the CDDA Scheme. A witness claimed that until 2019, CDDA claims against ASIC ‘were routinely considered and paid over many, many years.’[164]

5.127The Sterling First Action Group (SFAG) argued that ASIC, through defective administration in failing to properly regulate the formation and operation of the companies comprising the Sterling Group, should be held responsible for losses incurred, and thereby victims should be able to access the CDDA Scheme for those losses.[165]

5.128SFAG argued that the chronology showed ASIC had identified non-compliance issues with relevant companies, and repeatedly took no further action or took actions which SFAG viewed as inadequate and disproportionate to the suspected or actual misconduct.[166]

5.129The Prime Trust Action Group (PTAG) gave evidence at the public hearing on 4 October 2023 and provided a submission relating to this inquiry. They provided context about Prime Trust and the responsible trustee Australian Property Custodian Holdings. The PTAG advised that Prime Trust was a managed investment scheme available to retail investors, that the scheme had approximately 8000 or 9000 investors, and that these investors collectively lost $500million through likely fraud.[167]

5.130The PTAG discussed ASIC’s refusal to consider a claim brought by the PTAG made under the CDDA scheme in relation to Prime Trust. The PTAG obtained evidence in 2018–19, including written confirmation from the Department of Finance, that ASIC was covered by the scheme and could receive claims. The PTAG stated that, subsequent to lodging a claim under the CDDA scheme with ASIC in February 2019, ASIC advised that it had not been authorised to consider and determine such claims since2015.[168]

5.131The PTAG contested this claim, citing authorisation from the executive government in 2015 for ASIC to determine CDDA claims. They believed that inconsistent claims from Commonwealth entities about authorisations to determination has resulted in ambiguity and confusion to the detriment of individuals who have suffered harm.[169]

Act of grace payments

5.132At the time of writing, the ASIC website advises that while ASIC is not currently authorised to consider applications made under the CDDA Scheme, the act of grace mechanism does apply to ASIC.[170] Act of grace payments are discretionary payments authorised under section 65 of the Public Governance, Performance and Accountability Act 2013.[171]

5.133The PTAG asserted that there are a number of differences between the CDDA Scheme and act of grace payments. These include requirements for entities determining CDDA claims to act reasonably and according to principles of good decision-making, for CDDA claimants to be afforded procedural fairness, and for CDDA claims to only be rejected on publicly defensible reasons.[172]

5.134SRG Advisory told the committee that they had applied to the Department of Finance on behalf of three groups seeking compensation through act of grace payments. SRG Advisory argued that in all these cases, ASIC’s performance of its regulatory duties had been derelict. SRG Advisory also criticised ASIC on the basis that it acted as ‘judge, jury and witness’ in hearing and deciding claims for act of grace payments.[173]

Private litigation

5.135Given the concerns raised regarding ASIC capacity to investigate (and enforce) corporate misconduct, as well as concerns about AFCA’s capacity to provide redress for individuals experiencing disputes with entities in the financial industry, a question then arises as to what recourse is available for Australians who have experienced this type of misconduct.

5.136Where compensation paid directly from a Commonwealth entity such as ASIC is not accessible to individuals, private litigation may be the main or only recourse for achieving compensation. Indeed, at least some ‘no further action’ responses from ASIC to misconduct reports also advise that private legal remedies are an option for complainants to pursue their matters.[174]

5.137Significant barriers exist for individuals who may wish to seek compensation through private legal action. Submitters identified that private litigation is not feasible for many individuals to access compensation, and that ASIC should play a role in acquiring compensation for individuals rather than relying on individuals to privately litigate.

5.138Dr Evan Jones submitted that, unlike the moral and equitable basis of compensation schemes such as the CDDA and CSLR, the private legal sector ‘offers no holistic or equitable fence at the top of the cliff’.[175] Noting that ASIC does not generally intervene in individual matters, Dr Jones argued it should be ASIC’s role to ‘champion individual disputes in the courts because the victims lack the resources to do so’.[176]

5.139The AICD observed significant public interest in enforcing deceptive conduct provisions and continuous disclosure laws. They stated that ‘[t]here is a reasonable expectation that the corporate regulator should play an active enforcement role on these issues, rather than private litigants’.[177]

5.140As acknowledged by ASIC itself, clarifying or testing the law to ensure market participants understand their obligations is an important factor in the decision to pursue litigation; ‘Judicial clarification is important for both regulator and regulated’.[178] Where ASIC defers matters to be privately prosecuted, cases in which the law would benefit from clarification may not be brought.

Committee view

5.141As with many areas of ASIC’s work, the committee finds itself concerned with ASIC’s enforcement. ASIC’s enforcement powers are wide ranging, there are a number of tools available to it, and yet the evidence received repeatedly through this inquiry process shows that ASIC is not using those tools.

5.142It is clear that the community has broad concerns about ASIC’s enforcement. The case studies the committee has explored in this chapter demonstrate the limitations of ASIC’s enforcement culture and have shown it wanting. In particular, ASIC’s actions, or lack of action, as it relates to Nuix Ltd and Dixon Advisory are highly concerning and serve as important case studies of ASIC’sinaction.

5.143Of particular concern to the committee was the decline in criminal actions referred to the Commonwealth Director of Public Prosecutions, as well as the generally very low levels of litigation that ASIC engages in. A 52 per cent decrease in referrals to the CDPP over five years is highly concerning.

5.144The lengthy time for enforcement action to take place is also highly disappointing. The longer that ASIC takes to act in relation to corporate malfeasance, the more likely that there will be adverse consequences for the community at large. These consequences may include more people falling victim to a shady investment deal, or more generally a loss of confidence in Australia’s corporate landscape as one where people can work and invest without fear.

5.145As with the concerns raised about ASIC’s investigations, there is a sense that ASIC is a ‘black box’ when it comes to enforcement. Actions are commenced or not commenced based on an opaque set of considerations which are not visible to the public. This leaves the people who reach out to ASIC for help feeling helpless and lost in an already complex legal and regulatory system. As such the committee has made recommendations around transparency and the regulatory system.

Footnotes

[1]Note, for further detail see Chapter 3 (paragraphs 3.7 and 3.8) and Appendix 3.

[2]Maurice Blackburn Lawyers, Submission 4, p. 2.

[3]See, Chapter 3, paragraphs 3.48–3.42.

[4]See, Australian Institute of Company Directors, Submission 11, p. [3].

[5]See, Maurice Blackburn, Submission 4, p. 7.

[6]ASIC Act, para. 1(2)(d).

[7]See, Chapter 3, paragraph 3.69.

[8]See, for example, Australian Institute of Company Directors, Submission 11, p. [6].

[9]Dr Eugene Schofield-Georgeson, ‘Coercive Investigation of Corporate Crime: What Investigators Say’, University of New South Wales Law Journal, vol. 43, no. 4, p. 1407.

[10]ASIC, answers to written questions on notice set 1, 3 November 2022 (received 18 November 2022), pp. [10–11].

[11]Law Council of Australia, Submission 10, p. 4.

[12]Australian Institute of Company Directors, Submission 11, pp. 2, 4–5.

[13]Law Council of Australia, Submission 10, p. 4.

[14]Chartered Accountants Australia and New Zealand, Submission 14, pp. 5–6.

[15]Consumer Action Law Centre et al., Submission 6, pp. 15–16.

[16]See ASIC, Supplementary submission 1.5, pp. 8 and 46.

[17]See, for example, ASIC, Submission 1, p. 7.

[18]Mr Joeseph Longo, Chair, ASIC, Committee Hansard, 23 June 2023, p. 2.

[19]Mr Joeseph Longo, ‘Parliamentary Joint Committee Opening Statement’, Speech, 14 June 2024.

[20]Mr Joeseph Longo, ‘Parliamentary Joint Committee Opening Statement’, Speech, 14 June 2024.

[21]See, ASIC, Submission 1.5, pp. 55–56.

[22]See, ASIC, Submission 1.5, pp. 55–56.

[23]See, for example, Consumer Action Law Centre, Submission 6, p. 3.

[24]Australian Securities and Investments Commission, Submission 1, pp. 33–34.

[25]Mr Allan Fels, Private capacity, Committee Hansard, 1 November 2023, p. 26.

[26]Mr Allan Fels, Private capacity, Committee Hansard, 1 November 2023, p. 26.

[27]Mr Allan Fels, Private capacity, Committee Hansard, 1 November 2023, p. 25.

[28]Associate Professor Andrew Schmulow, School of Law University of Wollongong, Committee Hansard, 1 November 2023, p. 36.

[29]Small Business Development Corporation, Submission 9, p. 4.

[30]Small Business Development Corporation, Submission 9, p. 4.

[31]Australian Law Reform Commission, Final report: Corporate criminal responsibility, No. 136, April2020, p. 97.

[32]Ms Sarah Court, Deputy Chair, ASIC, Committee Hansard, 23 June 2023, p. 4.

[33]Ms Caroline Read, Submission 55, p. 4.

[34]Mr William O’Chee, Partner, Himalaya Consulting, Committee Hansard, November 2023, p. 22.

[35]Maurice Blackburn, Submission 4, p. 5.

[36]Dr George Gilligan and Professor Ian Ramsay, ‘Is There Underenforcement of Corporate Criminal Law? An Analysis of Prosecutions Under the ASIC Act and Corporations Act: 2009–2018’, Company and Securities Law Journal, vol. 38 no. 6, 2021, p. 8, as cited in, Associate Professor Andy Schmulow, Submission 19, p. 13.

[37]Associate Professor Andrew Schmulow, School of Law, University of Wollongong, Committee Hansard, 1 November 2023, pp. 34–35.

[38]Mr John Winter, Chief Executive Officer, Australian Restructuring, Insolvency and Turnaround Association, Committee Hansard, 23 August 2023, p. 1.

[39]See, for example, Sean Hughes, Commissioner, ASIC, ‘ASIC’s approach to enforcement after the Royal Commission’, Speech, 2 September 2019.

[40]Institute of Public Affairs, Submission 8, pp. 4–7.

[41]Small Business Development Corporation, Submission 9, p. 4.

[42]Law Council of Australia, Submission 10, pp. 6–7.

[43]Law Council of Australia, Submission 10, p. 2.

[44]Australian Institute of Company Directors, Submission 11, p. [6].

[45]CISA Consulting, Submission 52, p. [1].

[46]Australian Securities and Investments Commission v Dixon Advisory & Superannuation Services Ltd [2022] FCA 1105, [47].

[47]Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (Settlement Approval) [2024] FCA 386, [153].

[48]Australian Securities and Investments Commission, answers to written questions on notice set 73, 23 November 2023 (received 22December2023), p. 3.

[49]Australian Securities and Investments Commission, answers to written questions on notice set 73, 23 November 2023 (received 22December2023).

[50]ASIC, Annual Report 2022-23, p. 22.

[51]ASIC, Annual Report 2022-23, p. 22.

[52]ASIC, Annual Report 2022-23, p. 22.

[53]See, for example, Chartered Accountants Australia New Zealand, Submission 14, pp. 4–5; Australian Small Business and Family Enterprise Ombudsman, Submission 3, pp. 2–3.

[54]Chartered Accountants Australia New Zealand, Submission 14, pp. 4–5

[55]Chartered Accountants Australia New Zealand, Submission 14, pp. 4–5

[56]Chartered Accountants Australia New Zealand, Submission 14, p. 5.

[57]Australian Small Business and Family Enterprise Ombudsman, Submission 3, p. 2.

[58]Australian Small Business and Family Enterprise Ombudsman, Submission 3, p. 3.

[59]Australian Banking Association, Submission 5, p. 1.

[60]Financial Services Council, Submission 7, pp. 19 – 20.

[61]Australian Banking Association, Submission 5, p. 1.

[62]ASIC, Supplementary submission 1.2, p. 7.

[63]Note, relevant financial products are stipulated by Division 3 of the Corporations Act.

[64]See, Corporations Act, para. 1043(A)(2).

[65]ASIC, Supplementary submission 1.5, p. 38.

[66]ASIC, Supplementary submission 1.5, p. 38.

[67]ASIC, answers to written questions on notice set 1, 3 November 2022 (received 18November 2022).

[68]ASIC, Supplementary submission 1.5, p. 39.

[69]Dr George Gilligan and Professor Ian Ramsay, ‘Is There Underenforcement of Corporate Criminal Law? An Analysis of Prosecutions Under the ASIC Act and Corporations Act: 2009–2018’, Company and Securities Law Journal, vol. 38 no. 6, 2021, pp. 16–17.

[70]ASIC cited in Financial Services Council, Submission 7, p. 11.

[71]Financial Services Council, Submission 7, p. 11.

[72]Mr Lachlan Walden, Submission 61, p. [1].

[73]Mr Lachlan Walden, Submission 61, pp. [1–3].

[74]Mr Lachlan Walden, Submission 61, p. [3].

[75]Business Council of Australia, ‘Assessment of the Australian Securities and Investments Commission’, Submission to the Financial Regulator Assessment Authority, January 2022, p. 7.

[76]Department of the Treasury, Report of the independent review of the changes to the continuous disclosure laws: made by the Treasury Laws Amendment (2021 Measures No. 1) Act 2021, February 2024, p. 5.

[77]Australian Institute of Company Directors, Submission 11, p. 7.

[78]Australian Institute of Company Directors, Submission 11, p. 5.

[79]Madgwicks, Submission 59.

[80]See, Miklos Bolza, ‘'Underperforming' Nuix stayed mum after $1.8b float’, Canberra Times, 20November 2023.

[81]Mr Rolfe Krolke, Private capacity, Committee Hansard, 23 August 2023, p. 14.

[82]Mr Rolfe Krolke, Private capacity, Committee Hansard, 23 August 2023, p. 14.

[83]Mr Rolfe Krolke, Private capacity, Committee Hansard, 23 August 2023, pp. 14–15.

[84]Mr Rolfe Krolke, Private capacity, Committee Hansard, 23 August 2023, pp. 15–17.

[85]Mr Rolfe Krolke, Private capacity, Committee Hansard, 23 August 2023, pp. 18–19.

[86]Nuix, Submission 1.2, p. 5.

[87]Mr Mark Allen, Private capacity, Committee Hansard, 23 August 2023, pp. 29–30.

[88]Mr Mark Allen, Private capacity, Committee Hansard, 23 August 2023, pp. 29–30.

[89]Mr Mark Allen, Private capacity, Committee Hansard, 23 August 2023, pp. 32–33.

[90]AICD, General duties of Directors, 2021, (accessed 26 June 2024), pp. 1–4.

[91]AICD, General duties of Directors, 2021, (accessed 26 June 2024), p. 5.

[92]Australian Restructuring, Insolvency and Turnaround Association, Submission 15, p. 5.

[93]Mr John Winter, Chief Executive Officer, Australian Restructuring, Insolvency and Turnaround Association, Committee Hansard, 23 August 2023, p. 4.

[94]See, for example, Mr Donald Carter, Submission 48, pp. 1–3.

[95]Australian Restructuring, Insolvency and Turnaround Association, Submission 15, pp. 6–7; Australian Small Business and Family Enterprise Ombudsman, Submission 3, p. [6].

[96]Australian Restructuring, Insolvency and Turnaround Association, Submission 15, p. 6;

[97]Australian Small Business and Family Enterprise Ombudsman, Submission 3, p. [6].

[98]Australian Small Business and Family Enterprise Ombudsman, Submission 3, p. [6].

[99]ASIC, Director identification number,’

[100]Small Business Development Corporation, Submission 9, p. 3.

[101]See, ASIC, Submission 1, p. 61.

[102]See, ASIC, Submission 1, p. 61.

[103]ASIC, answers to written questions on notice set 1, 3 November 2022 (received 18November 2022).

[104]ASIC, answers to written questions on notice set 1, 3 November 2022 (received 18November 2022).

[105]ASIC, answers to written questions on notice set 1, 3 November 2022 (received 18November 2022).

[106]Australian Law Reform Commission (ALRC), Final report: Corporate criminal responsibility, No. 136, April2020, pp. 73–76.

[107]ALRC, Final report: Corporate criminal responsibility, No. 136, April2020, p. 96.

[108]ALRC, Final report: Corporate criminal responsibility, No. 136, April2020, p. 97.

[109]ALRC, Final report: Corporate criminal responsibility, No. 136, April2020, pp. 96–97.

[110]ALRC, Financial Services Legislation: Interim Report A, No. 137, November 2021, pp. 401–402.

[111]ALRC, Financial Services Legislation: Interim Report A, No. 137, November 2021, pp. 399–400.

[112]ALRC, Financial Services Legislation: Interim Report A, No. 137, November 2021, pp. 399–400.

[113]ALRC, Financial Services Legislation: Interim Report A, No. 137, November 2021, p. 408.

[114]Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report: Volume 1 (2019) [1.5.3], as cited by, Australian Law Reform Commission, Final report: Corporate criminal responsibility, No. 136, April2020, p. 77.

[115]Institute of Public Accountants, Submission 17, p. 6.

[116]Law Council of Australia, Submission 10, pp. 5–6.

[117]Australian Restructuring Insolvency and Turnaround Association, Submission 15, p. 13.

[118]Association of Financial Advisers (AFA), Submission 143, p. 6.

[119]AFA, Submission 143, pp. 6–7.

[120]AFA, Submission 143, pp. 6–7.

[121]AFA, Submission 143, p. 2.

[122]Australian Restructuring Insolvency and Turnaround Association, Submission 15, pp. 10–13.

[123]Mr Peter Keenan, Submission 25, p. 3.

[124]Professor Jason Harris, Submission 20, pp. 3–4.

[125]Associate Professor Marina Nehme, Submission 18, p. 6.

[126]AFA, Submission 143, pp. 2–3.

[127]See, for example, Financial Services Council, Submission 7, p. 7.

[128]See, for example, Consumer Action Law Centre et al, Submission 6, p. 14; Dr June Smith, Deputy Chief Ombudsman, Australian Financial Complains Authority, Committee Hansard, 1 November 2023, p. 36.

[129]Corporations Act 2001, pt 7.10A div 2.

[130]Dr June Smith, Deputy Chief Ombudsman, Australian Financial Complains Authority, Committee Hansard, 1 November 2023, p. 36.

[131]Australian Securities and Investments Commission, Submission 1, pp. 8, 44.

[132]AFCA, Approved Rules released 7 March 2024, p. 20.

[133]AFCA, Approved Rules released 7 March 2024, p. 46, cl. A.4.1.

[134]AFCA, Approved Rules released 7 March 2024, cl. A.4.2.

[135]ASIC, Australian financial services licence conditions: Pro Forma 209.

[136]ASIC, Australian financial services licence conditions: Pro Forma 209, cl 32.

[137]See, for example, Roger and Tracy Gott, Submission 194, p. 2.

[138]Consumer Action Law Centre et al, Submission 6, pp. 16–17.

[139]Consumer Action Law Centre et al, Submission 6, pp. 16–17.

[140]Australian Citizens Party, Submission 60, pp. 7–8.

[141]Financial Services Council, Submission 7, p. 7.

[142]Financial Services Council, Submission 7, pp. 7–8.

[143]See, for example, Mr Christopher Pitts, Private Capacity, Committee Hansard, 4 October 2023, p. 9; Mr Brad Weatherstone, Private Capacity, Committee Hansard, 4 October 2023, p. 10.

[144]AFCA, Approved Rules released 7 March 2024, p. 39, cl. D.3.

[145]ASIC, Submission1, pp. 46–47.

[146]See, for example, the Treasury, Compensation Arrangements for Consumers of Financial Services; Report by Richard St. John, April2012, pp. 16–17.

[147]See, for example, Ms Sarah Court, Deputy Chair, ASIC, Committee Hansard, 23 June 2023, p. 4.

[148]Ms Sarah Court, Deputy Chair, ASIC, Committee Hansard, 23 June 2023, p. 4.

[149]Ms Sarah Court, Deputy Chair, ASIC, Committee Hansard, 23 June 2023, p. 4.

[150]Maurice Blackburn, Submission 4, p. 3.

[151]Maurice Blackburn, Submission 4, p. 3.

[152]Compensation Scheme of Last Resort, What is CSLR?, https://cslr.org.au/about-us/what-cslr (accessed 24 June 2024).

[153]Law Council of Australia, Submission 10, pp. 1–2.

[154]ASIC, Submission1, p. 47.

[155]Mr David Locke, Chief Ombudsman and Chief Executive Officer, Australian Financial Complaints Authority, Committee Hansard, 1 November 2023, p. 37.

[156]See, for example, Treasury, Compensation Arrangements for Consumers of Financial Services; Report by Richard St. John, April2012.

[157]See, for example, Treasury, Compensation Arrangements for Consumers of Financial Services; Report by Richard St. John, April2012, pp. 143–144.

[158]Financial Services Council, Submission 7, pp. 8–9.

[159]Financial Services Australia, Submission 7, p. 9.

[160]Financial Planning Association of Australia, Submission 63, pp. 3–4.

[161]Parliamentary Joint Committee on Corporations and Financial Services, Oversight of ASIC, the Takeovers Panel and the Corporations Legislation No. 1 of the 46th Parliament, March 2022.

[162]Department of Finance, Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme) (accessed1July2024).

[163]Senate Legal and Constitutional Affairs Committee, Review of Government Compensation Payments, December 2010, pp. 46–47.

[164]Mr Steve O’Reilly, Joint Principal, Prime Trust Action Group, Committee Hansard, 4October2023, p. 22.

[165]Sterling First Action Group, Submission 53.

[166]Sterling First Action Group, Submission 53, pp. 5–6.

[167]Mr Roger Pratt, Joint Principal, Prime Trust Action Group, Committee Hansard, 4 October 2023, pp. 22–24.

[168]Prime Trust Action Group, Submission 51, pp. 1–2.

[169]Prime Trust Action Group, Submission 51, pp. 3–4.

[170]Australian Securities and Investments Commission, Financial compensation schemes, 1 November 2023 (accessed 25 June 2024).

[171]Department of Finance, Act of Grace Payments, 1 November 2023, (accessed 25June 2024).

[172]Prime Trust Action Group, Submission 51, pp. 2–3.

[173]Mrs Susan Barnett, Managing Director, SRG Advisory, Committee Hansard, 23 August 2023, pp.40‑41.

[174]Dr Evan Jones, Submission 47, p. 4.

[175]Mr Michael Sanderson, Submission 46, p. 1.

[176]Dr Evan Jones, Submission 47, p. 6.

[177]AICD, Submission 11, pp. 2–4.

[178]ASIC ASIC’s approach to enforcement after the Royal Commission, 2 September 2019.