Submission update: Senate inquiry into ASIC investigation and enforcement report

23/07/2024

The Senate Economics References Committee (SERC) has issued its report into matters relating to the Australian Securities and Investments Commission (ASIC) investigation and enforcement, recommending that, inter alia, ‘the Australian Government should recognise that [ASIC] has comprehensively failed to fulfil its regulatory remit’.

ARITA rates significant coverage in the report (pages 60 thru 67 and 93 thru 98) where we strongly advocated for the work done by our members.

What has become part of the zeitgeist is then-ARITA President Michael Brereton’s strong evidence to the (earlier) Joint Parliamentary Committee on Corporations and Financial Services inquiry into corporate insolvency, where he outlined his now-famous automatic rejection of a serious phoenix report.

The inquiry began in October 2022 with the SERC to report by the last sitting day in June 2024.

In response to a specific request from SERC, ARITA made a comprehensive submission in February 2023 which concluded the following:

We consider that ASIC is not a best practice regulator. In addition to it being inefficient and lacking transparency, it has failed to promote a turnaround culture in Australia, a problem identified by the Productivity Commission in 2015. It has done precious little to prevent illegal phoenixing. Its failure to adopt a vigorous risk-based approach to dealing with malfeasance of directors means that too much money is being spent on reporting that is not even considered by ASIC and too little enforcement action is brought against directors who are rorting the system.

Whilst this problem is not entirely systemic, it is our view that the best resolution to it is to be found in major reform of Australia’s insolvency system. This means developing a single insolvency law administered by a single dedicated insolvency agency modelled on the Australian Financial Securities Agency, the reasons for which are set out in our evidence to the Joint Parliamentary Committee [on Corporations and Financial Services inquiry into corporate insolvency].

ARITA also accepted an invitation by SERC to give evidence at a public hearing in relation to the inquiry, and ARITA CEO John Winter and Technical & Standards Director Narelle Ferrier appeared before the Committee on 23 August 2023.

ARITA does acknowledge the significant efforts of ASIC Deputy Chair Sarah Court and Commissioner Kate O’Rourke who have actively and positively engaged with ARITA since this Inquiry with a view to establishing a stronger and more collegiate relationship. We thank them for their efforts and look forward to continuing to work cooperatively into the future with the entire ASIC team.

The report makes 11 recommendations, set out below, including a recommendation to reassess the funding arrangements for ASIC or any alternative regulatory authority. 

  1. The Australian Government should recognise that ASIC has comprehensively failed to fulfil its regulatory remit.
  2. The Australian Government should recognise, based on the finding of recommendation one, that ASIC’s regulatory failures call into question whether its remit is too broad for it to be an effective and efficient agency, and the government should strongly consider separating its functions between a companies regulator and a separate financial conduct authority.
  3. The Australian Government urgently address the shortcomings in Australia’s system for handling reports of alleged corporate misconduct. In doing so, the committee recommends that the Australian Government make it a legislative requirement of ASIC or future regulatory authorities to investigate reports of alleged misconduct at an appropriate rate. Further, the committee recommends that:
    • the regulator develop consistent standards to transparently report data to the public on the handling of reports of alleged misconduct; and
    • the regulator establish service standards to require that people who submit reports of alleged misconduct are provided with clear, detailed and timely information on the tangible actions taken in response to their report.
  4. The statement of expectations which is currently issued for ASIC:
    • contain, among other things, expectations and priorities relating to transparency; and
    • be provided in draft form to the Parliamentary Joint Committee on Corporations and Financial Services for inquiry and report.
  5. The Australian Government make it a legislated regulatory objective of ASIC or other regulatory authorities to establish and maintain a high level of transparency of investigation and enforcement outcomes. Additionally, the committee recommends that these transparency objectives be supported by:
    • establishing a searchable public register of civil or criminal outcomes arising from reports of alleged misconduct received, and the outcome of the proposed regulatory authorities’ handling of those reports, subject to appropriate thresholds, similar to the approach taken by the US Consumer Financial Protection Bureau; and
    • developing a consistent, long-term public reporting framework that quantifies and assesses the proposed regulatory authorities’ performance and capacity to undertake its regulatory functions of investigating and enforcing breaches of corporations law.
  6. The Australian Government investigate amending the whistleblower protection provisions in the Corporations Act 2001 to include pecuniary incentives and compensation for whistleblowers who make a substantiated disclosure. The committee recommends that the pecuniary provisions be examined with a view to:
    • establishing a financial incentive for whistleblowers to make a disclosure in circumstances where addressing the misconduct would result in a significant public benefit; and
    • establishing a financial compensation mechanism for whistleblowers who are unable to make a disclosure in the public benefit without experiencing significant personal detriment, such as loss of career prospects.
  7. The regulatory authorities adopt an enforcement approach which prioritises the litigation of all serious instances of suspected breaches of corporations law, particularly in cases where consumer losses arise, or could have potentially arisen, from such breaches.
  8. The Australian Government review a new governance structure for ASIC or any new regulatory bodies. This structure would have a Chair or Chief Executive Officer as sole statutory appointee and accountable authority and the appropriateness of the commission structure entirely should be explored.
  9. The Australian Government should ensure that a legislated code of conduct be included as part of the governing documents of ASIC or any alternative regulatory bodies, and that the Chair and any other statutory appointees can be sanctioned for workplace misconduct that is found to have breached this code. Further, the committee recommends that the Australian Government establish a mechanism by which an alleged breach of this code of conduct by a statutory appointee can be examined by an appropriately independent and qualified panel.
  10. The Australian Government reverse its decision, announced in the 2023–24 Budget, to reduce the frequency of Financial Regulator Assessment Authority (FRAA) reviews from every two years to every five years. Further, the committee recommends that the FRAA undertake an inquiry into the effectiveness of the oversight mechanisms of corporate regulators.
  11. The Australian Government reassess the funding arrangements for ASIC or any alternative regulatory authority so that:
    • a greater level of funding can be directly resourced with the proceeds of regulatory fines—including late fees, court fines, penalties and infringement notices;
    • all reasonable steps are taken to ensure levies charged on industry subsectors under the Industry Funding Model are reduced, commensurate with increased resourcing to the regulator through the proceeds of fines; and
    • it is ensured that regulatory authorities are accountable for the level of resourcing linked to cost-recovered activity, and face obligations to rationalise surplus resourcing to reduce costs on the industry subsector participants.

It is important to note that Government members of the Committee filed a dissenting report 

Read ARITA’s Submission.

Read the Senate Economics References Committee Australian Securities and Investments Commission investigation and enforcement report.