Late 2016, the Australian Government called for a review of the Australian Securities and Investment Commission’s (ASIC) enforcement regime to assess the suitability of their existing regulatory tools.
The result saw the release of a report from the ASIC Enforcement Review Taskforce in December 2017 which included 50 recommendations for regulatory reform, including 5 relating to providing ASIC with additional direction powers over AFSL & ACL holders. A number of those recommendations were placed on hold pending the findings in the Royal Commission into the Financial Services Industry.
Alas, recommendation 7.2 in Commissioner Hayne’s Final Report provided for the adoption of the recommendations made by the taskforce which transposed into the release of draft legislation. This included reform that significantly increases ASIC’s directions powers.
What are the new direction powers & when are they triggered?
The new direction powers are proposed to be inserted at s.918(5) of the Corporations Act 2001 (Cth) and allows ASIC to direct licensees:
- not to authorise persons as authorised representatives,
- not to accept new clients,
- not to transfer a specific asset to another person,
- to conduct a review or audit the activities or records of an authorised representative,
- to appoint, engage or deploy a person to carry out specific tasks,
- to assess the extent of the contravention, identify impacted persons, and establish and implement a remediation program,
- as an ancillary step, to conduct a review of its records or systems prior to putting a compliance process in place,
- anything else specified in the Corporations regulations.
Where ASIC utilises its direction powers under 918(5)(e), the licensee can nominate a specified person, which ASIC can decide to approve.
ASIC may choose to issue a direction if they have reason to suspect a licensee has engaged in, is engaging in, or will engage in conduct that constitutes a contravention of a financial services law. As a trigger point, the ‘reasons to suspect’ broadens ASIC’s reach as all that is required is “something more than mere speculation”, which does also not need to be based on reasonable grounds.
What is the intention of the direction & how does it work practically?
The conduct specified in a direction must be targeted at addressing or preventing the suspected contravention that triggered the direction, or preventing a similar or related contravention.
Before a direction can be validly issued, licensees must be afforded the opportunity to appear at a hearing before ASIC and make submissions to ASIC on the matter. However, if ASIC considers that a delay in issuing the direction would be prejudicial to the public interest, this step can be circumvented – in these cases ASIC can issue an interim direction that expires at the end of a 21 day period.
A direction must be published on ASIC’s website as soon as practicable after it is issued.
How long does a direction last?
The direction may direct the licensee, in writing, to engage in conduct specified in the direction either for a specified period of time, by or until a certain time, or until a specified condition is met.
What are the implications for AFSL & ACL holders?
The direction powers not only expand ASIC’s regulatory tool kit but also provide an unseen level of control at a management level over regulatory matters. The use of the ‘reason to suspect’ test sets a low threshold for the use of the direction powers, and inherently brings with it material risks for AFSL & ACL holders, including potential cost implications.
This may be particularly relevant for those financial institutions that participated in the Royal Commission and had large numbers of documents made publicly available. These documents are now not only fair gain for plaintiff law firms, but also for the corporate watchdog in crossing the reason to suspect threshold.
These powers will arguably require licensees to take an accelerated approach to regulatory engagement and remedial actions in order to mitigate the risks associated with the use of those powers. Needless to say, the reputational implications associated with the publication of the direction, provides incentive enough for licensees to do everything possible to minimise the risk of ASIC using these powers.
On 8 May 2020, the Government announced a 6 month deferral to the implementation of the draft legislation associated with the Royal Commission, including ASIC’s expanded direction powers, to December 2020.
If you would like any further assistance with this, please contact us and a member of our Financial Services team will be able to assist.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.