The Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce has released a position paper for consultation: Position Paper 7 Strengthening Penalties for Corporate and Financial Sector Misconduct as part of its review of ASIC's enforcement regime. The Taskforce proposes substantially increasing the range of penalties available to ASIC and increasing the civil and criminal penalties available for corporate and financial misconduct under the Australian Securities and Investments Commission Act 2001; National Consumer Credit Protection Act 2009 and Corporations Act 2001.

Minister for Revenue and Financial Services Kelly O'Dwyer has welcomed the release of the Taskforce's paper and stated that the government is 'committed to improving outcomes for consumers and investors and a strong penalty framework plays a crucial part'. She added that 'In reviewing the current penalties regime, the Taskforce focussed on proposals that would enhance ASIC's enforcement toolkit, set penalties at an appropriate level for deterrence, and establish a consistent and robust regulatory regime. Together the proposals seek to foster greater industry compliance and improve public confidence in the financial system'.

Issues with the current system

The paper identifies three issues with the current enforcement and penalty regime. They are:

• Inadequacy of current penalties: The Taskforce writes that the variety of penalties available for some kinds of misconduct are inadequate to address the range and severity of misconduct.
• The current penalties are not a credible deterrent: According to the Taskforce, some current penalties are too low to act as a ‘credible deterrent’. The paper notes that this issue was also identified by the Financial System Inquiry (Murray Inquiry).
• There is Inconsistency between state and commonwealth provisions: The Taskforce states that some penalties are inconsistent with the penalties for equivalent Commonwealth and State provisions.

Principles informing the positions

The paper includes 16 positions. In developing these, the Taskforce notes that it had regard to the following 'principles':

• The enforcement regime should be comprehensive and facilitate both responsive regulation and enforcement oriented approaches.
• Penalties should represent a credible deterrent,
• Penalties should reflect the gravity of conduct, as well as the purpose for which they are imposed, and
• The penalties regime should be clear and consistent.

Positions

The positions put forward in the paper are as follows.

Position 1: The maximum imprisonment penalties for criminal offences in ASIC‑administered legislation should be increased.

The effect of this is that the most serious Corporations Act offences, given the nature and/or consequences of the offending (many involving dishonesty) would increase to the highest penalties available under the Act; 10 years imprisonment, 4,500 penalty units ($945,000) or 3 times benefits (individuals) and 45,000 penalty units ($9.45 million) or 3 times benefits or 10% annual turnover (corporations).

Position 2: The maximum pecuniary penalties for all criminal offences (other than the most serious class of offences) in ASIC-administered legislation should be calculated by reference to a formula as follows: Maximum term of imprisonment in months multiplied by 10 = penalty units for individuals, multiplied by a further 10 for corporations.

The effect of this is that the maximum fine amounts for criminal offences would increase, and be standardised by reference to a formula based on length of available prison term: Maximum term of imprisonment in months multiplied by 10 = penalty units for individuals, multiplied by a further 10 for corporations.

Position 3: The maximum penalty for a breach of section 184 should be increased to reflect the seriousness of the offence:

The preliminary position put by the Taskforce is that the maximum penalty for a breach of s184 Corporations Act 2001 should be increased to 10 years imprisonment and/or a fine:

• for individuals the greater of 4,500 penalty units or three times the benefit gained (or loss avoided); and
• for corporations the greater of 45,000 penalty units, or three times the benefit gained (or loss avoided) or 10% annual turnover. The position paper states that 'Increasing the penalty under section 184 would align the penalty with comparable state‑based offences. Further, it would realign the penalty with the maximum penalties for dishonest conduct in the financial services context (s1041G) and "cheating" in a markets context (e.g. section 1041A market manipulation and section 1043A insider trading). These penalties are of comparable seriousness and were increased in 2010, while the penalty for section 184 has remained unchanged since 2001'. In addition, the Taskforce writes that the proposal would ensure ASIC can consistently access its investigative powers in the prosecution of corporate offences.

Position 4: The Peters test [Peters v R (1998) 192 CLR 493] should apply to all dishonesty offences under the Corporations Act:

The Taskforce writes that in addition to amending the s184 penalty, the Corporations Act should be amended to include a 'single definition of "dishonesty" that reflects current common law'. Given the Peters test has been approved by the High Court as the preferred test for dishonesty, the Taskforce writes, the Taskforce 'considers that this would be the appropriate test to apply across all dishonesty-related offences in the Corporations Act'. According to the Taskforce, this would ensure consistency and certainty when prosecuting offences relating to dishonesty.

Position 5: Remove imprisonment as a possible sanction for strict and absolute liability offences:

The Taskforce’s preliminary view is, 'consistent with Report 6/2002 and the AGD guide, imprisonment should be removed as a possible sanction for the contravention of strict and absolute liability offences under the Corporations Act. The Taskforce considers there is no demonstrable evidence that the possibility of imprisonment for these offences increases deterrence and the enforcement of these offences.'

Position 6: Introduce an ordinary offence to complement a number of strict and absolute liability offences:

The Taskforce proposes to introduce a number of ordinary offences based on current strict and absolute liability offences (in recognition of the fact that imprisonment is not an appropriate sanction for some offences). According to the Taskforce, the new offences recognise that some current strict liability offences should be treated as a criminal offence if a fault element is present, and should be punishable by a fine and/or imprisonment term: 'The Taskforce is of the view that creation of a strict or absolute liability offence and an ordinary offence for the same conduct allows a tailored and flexible response to the conduct, depending on the circumstances in which the offence is committed'. The proposed classes of offences include (among others) obligations on listed company directors and secretaries to notify the market operator of certain information (section 205G), certain prohibitions on acquisitions of voting shares (section 606) and certain financial reporting and auditing obligations (sections 286, 307A and 989CA). The Taskforce proposes that the penalties for these offences should be 'significantly higher' than the current penalties, 'to reflect that the contravention is a deliberate breach of the corporate law and therefore a higher level of culpability'.

Position 7: Maximum pecuniary penalties for strict and absolute liability offences should be a minimum of 20 penalty units for individuals and 200 penalty units for corporations.

The Taskforce proposes that all strict and absolute liability offences under the Corporations Act be subject to a threshold of a maximum 20 penalty units for individuals and 200 penalty units for corporations. For all other strict or absolute liability offences under the Corporations Act, the pecuniary penalty for individuals should remain unchanged and for corporations, the current pecuniary penalty should be doubled. The Taskforce writes that this is consistent with the proposed formula for calculating criminal pecuniary penalties outlined under Position 2.

Position 8: All strict and absolute liability offences should be subject to the penalty notice regime:

The Taskforce writes that 'As part of its enforcement toolkit, ASIC currently has the ability to issue penalty notices. However this does not currently extend to all strict liability offences under the Corporations Act. The Taskforce proposes that a penalty notice regime should be available to ASIC for all strict and absolute liability offences under the Corporations Act'.

Position 9: Maximum civil penalty amounts in ASIC-administered legislation should be increased.

To ensure that ASIC can seek, and courts are empowered to, impose penalties that reflect community perceptions of the seriousness of engaging in corporate, financial market and financial services misconduct, the Taskforce writes, the Taskforce's preliminary position is that maximum civil penalties in ASIC administered Acts should be increased. The Taskforce writes that this should be done by:

• Expressing monetary amounts as penalty units, which are regularly reviewed and updated, rather than as fixed sums.
• Aligning the maximum civil penalties for contravention of the consumer protection provisions in the ASIC Act with the increases to financial penalties proposed for the Australian Consumer Law (following the review of that law) with equivalent penalties set by reference to penalty units as follows.

For individuals: increasing the penalty from $525,000 to 2,500 penalty units

For corporations: increasing the penalty from $10.5 million to the greater of 50,000 penalty units or 3 times the value of benefits obtained or losses avoided or 10% of annual turnover in the 12 months preceding the contravening conduct.

• In addition to expressing monetary amounts in penalty units, the Taskforce proposes that the court’s ability to determine the penalty on the basis of 10% of annual turnover in the 12 months preceding the contravening conduct should be an alternative to either the penalty unit amount or determination on the basis of 3 times the benefit gained or loss avoided.
• The Taskforce notes that in other regimes calculation of a penalty on the basis of annual turnover is only available where the value of benefits cannot be determined. The Taskforce states that approach it proposes would be 'broadly consistent with the regimes of overseas counterparts and other domestic regulators'.
• ASIC Position: The Taskforce notes that ASIC considers that the maximum civil penalty for an individual should be increased to $1 million (or the equivalent in penalty units) or 3 times the value of the benefits obtained or losses avoided. However, the Taskforce writes that it 'has not adopted this as its preliminary position but seeks submissions on whether such a penalty would be appropriate'.

Position 10: Disgorgement remedies should be available in civil penalty proceedings brought by ASIC under the Corporations, Credit and ASIC Acts.

The Taskforce notes that there is no clear mechanism for ASIC to seek 'disgorgement' of financial benefits in civil penalty proceedings currently. The Taskforce's preliminary position is that disgorgement remedies should be available in civil proceedings brought by ASIC under the Corporations, Credit and ASIC Acts to enable ASIC to seek orders requiring payment of an amount representing any profit gained or loss avoided by the person as a result of engaging in a contravention of a civil penalty provision. The Taskforce writes that this position recognises that 'it may not be appropriate for a defendant to retain a profit or benefit derived from contravening the law, particularly where the financial benefit can be quantified. This may be the case whether or not a person may also be liable to a pecuniary penalty order'. The Taskforce adds that it considers that 'the legislation should include a general disgorgement remedy that may be ordered on the application of ASIC. The court should retain the discretion to determine whether any payment is appropriate and how it should be applied given the circumstances. Where there are parallel proceedings for compensation it may be appropriate to make the funds available to satisfy compensation orders. Otherwise it may be appropriate for the funds to be paid to consolidated revenue'.

Position 11: The Corporations Act should require courts to give priority to compensation:

To ensure that priority is always given to compensating victims who suffer loss or damage as a result of misconduct, the Taskforce's preliminary position is that the Corporations Act should 'expressly require courts to give preference to making a compensation order where a defendant does not have sufficient financial resources to pay both a pecuniary penalty order and a compensation order'.

Position 12: Civil penalty consequences should be extended to a range of conduct prohibited in ASIC-administered legislation:

The Taskforce 'considers that a civil penalty should not be available for contraventions where one of the elements of the offence is dishonesty' (consistent with past Australian Law Reform Commission findings). 'Conduct of this nature is truly criminal in character and warrants a criminal sanction' the Taskforce writes. On this basis, the Taskforce's preliminary position is that civil penalty consequences should be extended to various provisions including (among others) various disclosure provisions eg s670A, s727, s728, s1012A-C.

Position 13: Key provisions imposing obligations on licensees should be civil penalty provisions:

The Taskforce's preliminary position is that provisions imposing general obligations on licensees should be civil penalty provisions as they 'impose a range of important obligations and are central to the effectiveness of the licence regimes' and as 'a licensee’s failure to comply with their obligations can cause significant detriment to clients, market participants, users and more broadly the Australian financial system'.

Position 14: Civil penalty consequences should be extended to insurers that contravene certain obligations under the Insurance Contracts Act 1984 (ICA):

The Taskforce proposes there should be civil penalty consequences for an insurer that breaches the duty of 'utmost good faith' or the insurer's obligation to provide a Key Facts Sheet.

Position 15: Infringement notices be extended to an appropriate range of civil penalty offences:

The Taskforce’s preliminary position is that infringement notices should be extended to an appropriate range of civil penalty offences under the Corporations Act, the Credit Act and Credit Code. The Taskforce writes that 'While infringement notices are part of ASIC’s enforcement toolkit in relation to breaches of market integrity rules, continuous disclosure and ASIC Act offences they are not currently available for a range of civil penalty offences under the Corporations Act and some offences under the Credit legislation. The introduction of an infringement notice regime for these provisions provides ASIC with an additional regulatory response to these lower level breaches'.

Position 16: Infringement notices should be set at 12 penalty units for individuals and 60 penalty units for corporations for any new infringement notice provisions:

The Taskforce’s preliminary position is that infringement notice amounts 'should generally be set at the prescribed maximums in the AGD guide: 12 penalty units for individuals and 60 penalty units for corporations'. Currently, the Taskforce notes, the penalties available under most existing infringement notice provisions under ASIC administered legislation are 12 penalty units for individuals (currently $2,520), 60 penalty units for corporations (currently $12,600) or a specified proportion of the maximum penalty that could be levied by a Court. The Taskforce adds that any existing infringement notice provisions, including those amounts that are above the AGD guide (ie continuous disclosure, Credit legislation) would remain unchanged and that the Taskforce would consult on whether a 'ratio-type regime, similar to the Credit Act would be more appropriate, noting this will result in higher infringement notice amounts'.

Other issues on which the Taskforce is consulting

In addition, the Taskforce is seeking comment on three additional matters. These included (among others)

• Should s180 remain a civil penalty provision? The Taskforce noted that some members of the Taskforce had questioned whether s180 of the Corporations Act should remain a civil penalty provision. Taskforce proposes to consult on whether it is appropriate for section 180 to remain a civil penalty provision and will make recommendations after considering submissions received.
  Whether civil penalty consequences should be available as an alternative to criminal prosecution for a range of additional provisions.
• Consultation closes on 17 November, and Minister for Revenue and Financial Services Kelly O'Dwyer has stated that the taskforce will provide its recommendations to government by the end of November.

Two financial advice associations reportedly supportive of proposed changes

Independent Financial Adviser writes that two financial advice industry associations (FPA and AIOFP) have welcomed the proposed changes to the penalty regime. According to the article FPA head of policy and government relations Ben Marshan said tougher penalties would be an effective way to deter advisers and other financial services professionals from engaging in bad behaviour and added that the proposal to strengthen penalties was not surprising given that changes to penalties were flagged as an area of concern when the ASIC taskforce was established last year following recommendations by the Financial System Inquiry.