Asic as regulator and litigato
LegalCorporateCompliance22/06/2021 12:00:00 AM

Company Law - The role of ASIC as regulator and litigator

This article explores the role of ASIC as Australia’s integrated regulator for corporations, financial markets, financial services and consumer credit. ASIC is an independent agency of the Commonwealth Government set up under, and governed by, the Australian Securities and Investments Commission Act 2001 (ASIC Act). ASIC carries out most of its work under the Corporations Act 2001. However, the regulator also administers the Business Names Registration Act 2011, the Insurance Contracts Act 1984 and the National Consumer Credit Protection Act 2009, as well as parts of other legislation.

ASIC engages in regulation, governance, compliance and enforcement. There is a need to balance these roles, in particular the roles of regulator/corporate watchdog versus litigator/prosecutor.

The role of ASIC as regulator

ASIC’s role as the corporate regulator is to:

  • facilitate and improve the performance of the financial and corporate sector and its participants,

  • register financial services providers and grant Australian financial services1 and credit licences.

  • promote confidence and informed participation by investors and consumers in the financial and corporate sector,

  • administer the laws (over which ASIC has governance) efficiently and effectively, including taking the necessary action to investigate and give effect to those laws, and

  • receive and process information and make information about companies and other entities publicly available as soon as practicable. ASIC maintains several business registers to assist this process.

Put simply, ASIC is responsible for ensuring the proper operation of company and financial services laws for the benefit of consumers, investors, shareholders and creditors.

ASIC’s objective is for a fair, strong and efficient financial and corporate sector, by:

  • changing behaviours to ensure fair consumer and investor outcomes,

  • acting against misconduct to maintain trust and integrity, and
  • promoting strong and innovative development and investment in the corporate sector. 

ASIC works closely with several other regulators including the Australian Financial Security Authority (AFSA), APRA, Australian Competition and Consumer Commission (ACCC), Director of Public Prosecutions (DPP), ATO, ASX, RBA, AFP and the Takeovers Panel. ASIC also works closely with a range of international organisations and foreign regulators in relation to surveillance, compliance and policy research.

ASIC’s role as a regulator has become even more important following the COVID-19 pandemic as many businesses face financial uncertainty and corporate vulnerability is at an all-time high2.

The role of ASIC as litigator

Under the ASIC Act, the regulator has investigative powers to conduct a formal investigation where it suspects a breach of corporate duty. Investigations may require a person to appear before the Regulator (s 19) to provide information relevant to the investigation and to provide reasonable assistance. ASIC may inspect company books (s 29) or issue a notice demanding a company, or certain officers, produce the company’s books.

ASIC also has enforcement powers to institute civil or criminal proceedings under the legislation which it administers. Proceedings may include actions against directors, companies or other officers of a company, for matters such as breach of duties, misappropriation and insolvent trading. Actions by ASIC may also include banning individuals or companies from holding a financial services license, banning defective products, issuing infringement notices or court-enforceable undertakings from co-operating parties.

Civil actions may lead to penalties, court orders for injunctive relief, corrective action, compensation, and perhaps the winding up of insolvent companies. Because ASIC can bring criminal proceedings for conduct for which it has already obtained a criminal penalty (s 1317P of the Corporations Act), ASIC may occasionally take civil action as an interim protective measure, whilst investigation of possible criminal matters is still on foot.

Criminal actions are usually referred to the DPP and ASIC is obliged to provide the DPP with all the material and information relevant to the defendant’s case. However, ASIC may elect to prosecute minor regulatory infractions of the law. This has held to some speculation that ASIC prefers to bring civil proceedings, which it can undertake itself, as opposed to criminal proceedings which it may have to hand over to the DPP, particularly in cases where both options are open to the regulator. This allegation was again raised as a concern during the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) where it was felt that ASIC was too lenient on some corporate misconduct.

ASIC has more limited powers in some areas, such as the power to prosecute get-rich-quick schemes, which is largely the role of the ACCC.

ASIC’s role following the Banking Royal Commission

The Banking Royal Commission handed down its final report on 1 February 2019. The report was largely critical of ASIC’s response to financial sector misconduct and the limited use of its enforcement powers. In short, the Commission felt that ASIC had been too lenient to date on market participant misconduct. The report made several recommendations to improve consumer outcomes in the financial sector. This feedback has resulted in ASIC implementing changes in its operations. This has included the introduction of legislation to:

  • tighten criminal and civil penalties for financial sector misconduct — Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019, and

  • introduce a design and distribution obligation regime for financial services firms and a product intervention power for ASIC — Treasury Laws Amendment (Design and Distribution Obligations and
  • Product Intervention Powers) Act 2019.

ASIC is subject to even more scrutiny following the Financial Regulator Assessment Authority Bill 2021, which creates a statutorily independent Authority to assess both ASIC and APRA’s performance, effectiveness and capabilities at least once every 4 years. This stemmed from 2 recommendations of the Banking Royal Commission (recommendations 6.13 and 6.14) to increase examination, review and reporting on the Regulator by an independently-chaired body, following the injustices revealed by the Commission’s report. The Banking Royal Commission highlighted that, while the Regulators operate within complex accountability frameworks, their effectiveness in delivering on their objectives is not subject to consistent and independent expert review over time3. The Financial Regulator Assessment Authority Bill is designed to address this.


You can read more about the Banking Royal Commission on our Pinpoint platform here.

Conclusion

It is important to remember that regulators are creatures of legislation and can be empowered or subdued by the work of Parliament. This article demonstrates the breath of ASIC’s roles, powers, obligations and responsibilities. It is safe to say that ASIC’s role as corporate watchdog takes precedent over its role as litigator and prosecutor, but there remains a need to balance both obligations.

You can read more about ASIC’s role and responsibilities on our Pinpoint platform here.

Sources: ASIC website, ASIC’s Role, accessed 22 June 2021.

FindLaw, The Corporate Policeman: ASIC’s powers of investigation and prosecution, Lethbridge G, accessed 22 June 2021.

The Organisation for Economic Co-Operation and Development (OECD), Corporate Sector Vulnerabilities during the Covid-19 Outbreak: Assessment and Policy Responses, 5 May 2020, accessed 22 June 2021.

My Business, Royal commission report slams ASIC, 2 October 2018, accessed 22 June 2021.

Banking Royal Commission Final Report, 1 February 2019, accessed 22 June 2021.

Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019, accessed 22 June 2021.

Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019, accessed 22 June 2021.

Financial Regulator Assessment Authority Bill 2021, accessed 22 June 2021.

CCH Pinpoint ®, ASIC, accessed 22 June 2021.

CCH Pinpoint ®, Banking Royal Commission, 27 October 2020, accessed 22 June 2021.

Footnotes
1 The term “financial services” covers a broad range of services, including superannuation, insurance, deposit-taking and credit.

Corporate Sector Vulnerabilities during the Covid-19 Outbreak: Assessment and Policy Responses, The Organisation for Economic Co-Operation and Development (OECD), 5 May 2020.

3 For example, performance audits by the Australian National Audit Office are conducted on an ad hoc basis and the International Monetary Fund reviews the Regulators on a 5-yearly basis onl