ASIC enforcement must get tough: Commissioner

ASIC's enforcement arm must wrangle more muscle but it should be separated from the regulator's day-to-day dealings with its subjects, the Royal Commission final report said.

Commissioner Kenneth Hayne said when ASIC identifies misconduct, its starting point should be "why not litigate?" instead of the "negotiate" tack the regulator has traditionally taken.

Compliance is not "voluntary" and the companies that ASIC oversees are not its "clients", Hayne said.

He asks that ASIC make it a policy to only agree to enforceable undertakings if the entity acknowledges its misconduct as opposed to just acknowledging ASIC's concerns about its conduct - as has traditionally been the case.

Hayne also expressed hope that ASIC's use of enforceable undertakings may fall if the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Cth) is enacted, which gives ASIC disgorgement remedies in civil proceedings and a directions power, which extends to ordering remediation.

Hayne's enforcement solution

The Commissioner has already ruled out handing over a part of ASIC's remit to the Australian Competition and Consumer Commission (ACCC).

He stopped just short of recommending a civil enforcement agency for misconduct evidence gathered in ASIC investigations.

While such a body could have specialist litigation expertise, and it would preserve the twin peaks model, it would be a radical step as it could have other effects on ASIC's work that aren't fully understood.

"But, more importantly, ASIC has acknowledged that its enforcement culture must change. It should be given time to demonstrate that changes can be made and to demonstrate that, once made, the changes are durable," Hayne said.

His final recommendation on the matter is for ASIC to have a separate enforcement arm which is divorced from other functions of the regulator, to the greatest extent possible.

"So, for example, enforcement staff will have to negotiate about litigation that is on foot. But those meetings should be conducted through the parties' legal representatives and with appropriate formality," he said.

Hayne recommends that ASIC's enforcement staff should not be responsible for the general relationship between the regulator and the regulated entity. Their involvement with an entity should be matter-specific.

"Within the regulator, enforcement officers must be relied upon for clear and objective advice and action. Those responsible for continuing supervision of an entity may give too much weight to past good conduct, or may - even subconsciously - explain away conduct that would otherwise raise a red flag," he said.

ASIC is already conducting an internal review of its enforcement policies, for which it should not be criticised Hayne said as this is a problem of changing culture more than needing to pass new law.

Fee-for-no service EUs didn't work

The report cited the big four's treatment of ASIC's 2015 investigations. It showed they had charged fees for services they did not provide and the regulator filed a report in 2016.

Yet ASIC accepted EUs from ANZ and CBA just days before the Royal Commission public hearings kicked off last year, and commenced civil proceedings against NAB/NULIS Nominees in September.

"Despite ASIC's investigation, the evidence led in the Commission showed that some entities may have continued to charge fees for which no service was provided until the matters were examined publicly by the Commission," Hayne said in the final report.

"And no less importantly, the evidence of protracted negotiations between ASIC and entities about how entities would frame their remediation programs showed their unwillingness to accept that what they had done was wrong. Maintaining that kind of attitude would have been all the harder had a court decided the issue," he said.

Read more: ASICRoyal CommissionCommissioner Kenneth HayneConsumer CommissionANZAustralian CompetitionBillCBANAB/NULIS NomineesTreasury Laws Amendment
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