Major shortcomings at the Australian Securities and Investment Commission (ASIC) have been laid bare in a new report, which found the corporate cop is a “toothless tiger” and “not a capable regulator”.
Led by Liberal Senator Andrew Bragg, the report — some 20 months in the making — makes 11 key recommendations to address a range of problems: that ASIC is too focused on its own internal issues, too sprawling to be effective, and that it would benefit from a major structural overhaul.
“While ASIC tries to deflect criticism that it is a weak corporate regulator by promoting its recent enforcement actions, the reality remains that corporate law is under-enforced in Australia,” the report says.
“ASIC’s response to most reports of alleged misconduct is to take no further action and only a fraction of reports are investigated. For the matters where ASIC proceeds to take enforcement action, the civil penalties imposed are often at odds with the scale of the offending, and few criminal sanctions are achieved. Further, ASIC’s investigation and enforcement decisions are opaque and difficult to scrutinise.”
ASIC ‘has comprehensively failed’
The first recommendation is perhaps the most telling: the Australian Government must recognise that ASIC “has comprehensively failed to fulfil its regulatory remit.”
The second, based on the findings of the first, is that ASIC’s too-broad remit can be addressed by splitting ASIC into a companies regulator and a separate financial conduct authority.
These are the big ones. More so than any other law enforcement agency, ASIC’s role in enforcing corporations law is underpinned by the need to protect financial service consumers and investors. By extension, the regulator helps to provide economic value by fostering productivity and market integrity.
“The overburdening of ASIC with its excessive remit is one of the principal issues facing Australia’s system of corporate regulation,” the report says.
“In the years ahead, the administration of ASIC’s remit will conceivably become even more challenging, as financial markets and products grow and become more complex, and the threat of digitally enabled misconduct continues to grow.”
Investigation reforms
ASIC’s unique role requires a significant degree of transparency. The report’s third recommendation, therefore, is that the Australian Government make it a legislative requirement that ASIC — and future regulatory authorities — investigate reports of misconduct at an appropriate rate.
This includes the need to keep the public informed on the handling of reports of alleged misconduct, as well as transparency around exactly how each case is being handled.
“When ASIC’s modus operandi is to undertake investigation and enforcement work in secret, the Australian public is deprived of information that would allow it to engage with financial markets in an informed way,” the report says, adding that the adverse effects of this were “painfully apparent” in ASIC’s handling of cases.
New enforcement tools
Though ASIC has a variety of tools with which to address misconduct, the report argues they are perhaps not being meaningfully deployed.
“The fact that ASIC wields a ‘big stick’ means that it should be able to ‘speak softly’,” the report says.
“During the inquiry, the committee received evidence of instances where ASIC could have acted earlier and, in doing so, prevented the harm to consumers and investors.
“While the committee is mindful that corporate misconduct can be inherently difficult to detect, the committee is deeply concerned about the harms to the public that result from the under-enforcement of corporate law.”
There are additional recommendations about transparency here — including a public register of civil and criminal outcomes — but also others that relate to whistleblower protections under the Corporations Act 2001.
It was suggested that a financial incentive be established for whistleblowers to come forward in matters that would result in a significant public benefit, as well as a financial compensation mechanism for whistleblowers who would be unable to disclose misconduct without personal detriment, such as the loss of career prospects.
The committee also recommended that an “enforcement approach” be adopted, which prioritises the litigation of all serious breaches of corporations law, particularly those involving consumer losses, potential or otherwise.
‘Swiss cheese’ governance
The final recommendations relate to governance and funding, which have shown a clear need for reform.
“The ‘Swiss cheese’ approach to governance, which is the current status quo in ASIC, is clearly unsatisfactory and has allowed for poor performance and infighting between its statutory appointees to become the norm,” the inquiry states.
“The committee has also made recommendations around ASIC’s funding arrangements based on the evidence it received that the industry funding model was not fit for purpose.”
As such, the suitability of the “commission structure” has been called into question, with the committee suggesting a Chair or CEO should serve as ASIC’s sole statutory appointee and accountable authority.
It also recommends including a legislated code of conduct in ASIC’s governing documents, and thoroughly re-assessing the regulator’s financing arrangements.
The report suggests a greater level of funding can be directly sourced with the proceeds of regulatory fines, and that levies charged on industry subsectors under the Industry Funding Model are reduced in line with those proceeds.
“Clearly, exercising ASIC’s responsibilities needs to be done better and it needs to be done differently,” the report concludes.
“Continually assigning ASIC more duties and powers will simply deliver more of the same result: an overburdened and monolithic regulator that fails to meet expectations. Addressing the challenges faced by ASIC, and the broader challenges in Australia’s financial system, requires strong action from the Australian Government. It also requires ASIC’s leadership to critically reflect on the evidence of ASIC’s underperformance and to use that as opportunity for improvement.”
Write to Oliver Gray at Mining.com.au
Images: IGA
