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BFCSA: ASIC faces hurdle with 'fairness' prosecutions

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ASIC faces hurdle with 'fairness' prosecutions

Australian Financial Review Apr 4, 2019 11.00pm

Michael Pelly


Obligations on financial services companies to ensure their services are provided "efficiently, honestly and fairly" look set to be a key source of tension between ASIC and banks as part of the regulator's "why not litigate" approach.

ASIC deputy chair (enforcement) Daniel Crennan told The Australian Financial Review that the "fairness" provision of Corporations Act – Section 912A – will now be a vital part of the regulator's arsenal.

Until March, 912A had no teeth, but there are now civil penalties of up to $525 million for some companies and $1.05 million for individuals.

Mr Crennan also pressed for changes to the federal criminal code to make it easier to pursue prosecutions that involve a mixture of state and federal offences in the Federal Court.

The enforcement sector got a budget boost this week with an extra $404.8 million over four years from 2019-20 for ASIC and $145 million more in the same period for APRA. There was also $35 million for the new corporate crime division of the Federal Court.

Use of taxpayers' money

Mr Crennan pointed out that Section 912A had been used up to now "in the context of a case about something else and seeking declarations".

"That should not be something we should be using taxpayers' money on," he said. "We don't have to worry about that any more because we have got our civil penalties ... That will produce, one would think, a number of cases."

The provision will likely be very effective when looking at compliance programs and directors' duties, but lawyers warn it could be a battleground for litigation.

Allen partner Michelle Levy said notorious "grey areas" around fairness in law didn't matter so much when there were no "grave" consequences.

It could be a different story if there was a lot at stake, she said.

"I suspect that a licensee will be slow to admit a breach of the obligation to provide financial services or credit assistance efficiently, honestly and fairly where they are not certain about what the obligation requires.

"There remains quite a lot of room for doubt about what the obligation means and, in turn, when it is breached."

Gilbert + Tobin litigator Richard Harris has said the introduction of a penalty regime "for subjective concepts like 'fairly and efficiently' would fundamentally alter the enforcement landscape for corporates and financial services licensees".

"What is fair or efficient for the precise purposes of the act is not always clear," Mr Harris said.

The lawyers seem to be at odds with Mr Crennan, who said a passage from a 2017 Federal Court case – ASIC v Avestra, which he read to The Australian Financial Review Banking & Wealth Summit, showed "efficiently, honestly and fairly" was a composite obligation and "the way it works is not in doubt".

"The notion of fairness is not new," Mr Crennan said.

"With penalties that jurisprudence will expand, but that is a very straightforward easily digestible account of what that [fairness] means.

'Entirely different beast'

Arnold Bloch Leibler partner Susanna Ford conceded ASIC had "scored some recent goals against corporates for breaches of fairness obligations".

"But effectively litigating for failures of culture caused by individuals is an entirely different beast.

"Litigating unfair conduct requires normative judgments and is heavily context dependent. And that is in addition to ASIC proving individual failures of directors' duties, in the circumstances of each case.

"In its newfound enthusiasm to litigate – and if successful, kill one director to educate a thousand – ASIC also needs to balance some very real risks.

"Cost to all stakeholders is obvious. However, it also risks damaging its own, directors' and other organisations' reputations, provoking class litigation against its targets, and forcing the recognition of new contingent liabilities with corresponding disclosure issues."

Hands were tied

Mr Crennan said the absence of penalties had tied the regulator's hands.

"When you have sections like 912A that dictates the core obligation that financial services licensees owe to their customers … and there are no penalties that attach to those obligations, it is pretty obvious that negotiations and enforceable undertaking are really the only regulatory option."

Mr Crennan welcomed the move to the Federal Court for criminal prosecutions, even though the usual mixture of state and federal charges might require further legislation.

"Some states have codified provisions which we, as a federal organisation, find it easier to use than others.

"It's not beyond the imagination of men and women to analyse the state codes and acts and to pick the most effective of the codified provisions ... and incorporate them into a federal criminal code to accommodate that."

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