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BFCSA: ASIC prefers quicker, cheaper enforcement action: Ian Ramsay

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ASIC prefers quicker, cheaper enforcement action: Ian Ramsay

Australian Financial ReviewMar 11 2018 11:45 PM

Joanna Mather


The Australian Securities and Investments Commission (ASIC) rarely punishes financial services wrongdoing through the courts, raising questions about whether the regular sent strong enough deterrence messages in the years leading up to the royal commission, University of Melbourne economics professor Ian Ramsay says.

Analysis by Professor Ramsay, who chaired a Turnbull-government initiated review of dispute resolution in the financial system, reveals just 11 per cent of ASIC enforcement action in the area of financial services between 2011 and 2016 was criminal in nature.

That raised questions about whether ASIC had "fully utilised all of its enforcement powers in order to send the strongest deterrent message, firstly to the individuals concerned and secondly to the broadly regulated community," he said.

In two new academic papers, Professor Ramsay and colleagues demonstrate a profound shift away from litigation by ASIC in all regulatory areas other than small business, to the extent that banning orders are now the dominant mode of corporate law enforcement in Australia.

In financial services – the focus of the royal commission, the next hearings of which begin on Tuesday – there has been a surge in enforcement action but that has overwhelmingly involved administrative remedies such as banning orders, "negotiated" outcomes and enforceable undertakings.

"When ASIC chooses certain enforcement action, inevitably there are messages sent to the regulated community," Professor Ramsay, the Harold Ford Professor of Commercial Law, told The Australian Financial Review.

"A general view is, when ASIC goes criminal it sends the most powerful messages because a defendant could go to jail.

"It is in financial services that we see that the prime area of enforcement is negotiated outcomes and things like banning orders.

"On the other hand, you take insider trading and the vast majority of the actions are criminal"

Former ASIC chairman Greg Medcraft has described Australia as a "paradise" for white collar criminals because of the soft punishment of corporate offences. He has called for harsher jail terms and bigger penalties for white-collar crime.

Professor Ramsay was able to analyse trends in enforcement action after ASIC in 2012 began publishing biannual reports detailing such action.

The reports provide information about the regulator's use of criminal, civil, administrative remedies, enforceable undertakings and negotiated outcomes, and public warning notices.

"Many of ASIC's enforcement outcomes are criminal outcomes – nearly 70 per cent – but this is due to the high number of criminal outcomes obtained by ASIC's small business compliance and deterrence team," says a paper published in the Companies and Securities Law Journal in November 2017.

"The other regulatory areas – market integrity, corporate governance and financial services – have a greater focus on administrative outcomes."

The paper notes a "pronounced use of administrative remedies" from the second half of 2014 onwards. This was driven by a gradual increase in the use of administrative remedies by the financial services enforcement team and a sharp rise in such remedies by the corporate governance enforcement team.

"ASIC often uses administrative remedies as a formal enforcement mechanism to respond to financial services misconduct, particularly in relation to 'credit' and 'other financial services misconduct' types of wrongdoing," the paper says.

According to ASIC annual reports, the regulator's success rate on major litigation is more than 90 per cent.

A spokesman for the regulator said: "ASIC's role is to shape the behaviour of those we regulate to comply with the law.

"A lot of the time we do this through criminal action, often with civil and administrative action but also with negotiated outcomes. We have a range of tools to achieve the outcome we are seeking."

A second paper published in February says ASIC has made more banning orders during the past 10 years than all other major enforcement outcomes combined.

There are four types of banning orders: bans prohibiting individuals from managing corporations, providing financial services, engaging in credit activities and auditing self-managed superannuation funds.

Banning orders are issued unilaterally by ASIC, not through the courts, although the orders can be appealed via the Administrative Appeals Tribunal. The researchers analysed 30 years' worth of data on banning orders.

"In the 10 years since 2005-06, there were more banning orders than all other major enforcement outcomes combined," the paper says.

"Banning orders were also increasingly severe in duration due to an upward trend in financial services and credit activity bans, about 47 per cent of which were permanent in duration collectively."

The growing prominence of banning orders "may partly reflect ASIC's increasing mandate and budgetary pressures and a need for quicker, cheaper enforcement alternatives".

Professor Ramsay said: "It's a shift away from litigation generally to these methods of enforcement where ASIC itself imposes the punishment and I'm not sure that people have picked up on what a significant trend this has been.

"One can understand this because there is an element of uncertainty about going to court, there is an element of time, and if you win you can't control whether there will be an appeal.

"And then combined with all that there is a cost element so there appears to be a growing preference for enforcement outcomes that ASIC itself can impose that quicker, lower cost but not without controversy."

The researchers call for greater transparency and accountability by ASIC for banning orders.

"The increasing prevalence and severity of banning orders ... raise concerns regarding the accountability of banning practices," the paper says.

"The judiciary has acknowledged that banning orders, while primarily protective in purpose, also function as a form of retribution akin to criminal punishment.


"Yet administrative hearings are not subject to the rules of evidence that apply to criminal court proceedings and the reasons for banning orders are not available to the public."

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