Shipton sails home to make regulatory waves
A new commander will take the helm at ASIC following the appointment of James Shipton as incoming ASIC Chairman for a five year term commencing on 1 February 2018. He replaces former Chairman Greg Medcraft, who led ASIC since 2011. While no doubt there will be some change, we expect many things will remain the same.
Mr Shipton returns to Australia from his current position as Executive Director of the Program on International Financial Systems at Harvard Law School. He will bring to the role a broad range of regulatory, banking and legal experience, having previously served as a Commission Member and Executive Director at the SFC, with responsibility for the Intermediaries (Supervision and Licencing) Division, Head of Government and Regulatory Affairs in Asia Pacific at Goldman Sachs and, prior to that, various roles in investment banking and as a lawyer in Singapore, Hong Kong and London.
Mr Shipton’s remarks during his appointment press conference in October 2017 give us some insight into his likely areas of focus once he takes the reigns next year.
First, it is clear that "culture" in financial institutions will remain very firmly on ASIC’s radar. Culture has previously been a key focus of Mr Shipton’s, both as a regulator at the SFC and as an academic at Harvard, and we expect he will continue his predecessor’s enthusiasm for this important regulatory priority. At his appointment press conference, Mr Shipton made clear that he regards ASIC as the “guardian” of public trust in financial markets and institutions and that culture is “among the greatest challenges for all financial markets globally”. He made clear he intends to continue his work as an advocate for cultural reform in financial markets and institutions once he joins ASIC.
Mr Shipton did not call for expansion to ASIC’s existing powers and commented that he was happy with recent reforms in this area and regarded Australia as one of the “leading jurisdictions” when it comes to responding to financial crises and their ongoing effects. We expect that Mr Shipton will spend some time exploring and testing ASIC’s capabilities, and will allow the ASIC Enforcement Review Taskforce to do its work, and a product intervention power to be introduced, before making public calls for further expansions to ASIC’s toolkit.
Like his predecessor, Mr Shipton’s previous global experience and regulatory connections will ensure ASIC and Australia remain closely engaged with global regulatory developments. To that end, we see cooperation with other regulators as a key focus.
The question many are asking is whether ASIC will continue its enforcement-led approach under Mr Shipton’s watch. Based on his previous experience we expect the answer to this is yes, which in turn focuses our attention on the yet-to-be filled role of ASIC commissioner for enforcement.
ASIC “connecting the dots” through big data
“Data” is the new gold and, just as financial services firms are building their data capabilities to learn more about their customers’ wants and needs, ASIC is prioritising data as a means of regulating those firms more effectively.
The Federal Government committed in its 2016-17 Budget to a $121 million funding package for ASIC over four years designed to, among other things, enhance ASIC’s data analytics and surveillance capability. ASIC has now released its Data Strategy for 2017-2020 outlining how it will “capture, share, and use” data to improve its oversight of regulated firms.
ASIC’s key initiatives include:
- establishing a Chief Data Office and introducing new frameworks and forums to improve the governance and quality of data it collects;
- establishing a centralised repository of regulatory data to optimise usage of captured data;
- establishing a “data science lab” to improve its approach to data analytics so as to better detect, understand and respond to misconduct; and
- implementing data exchange frameworks to improve information sharing with other agencies.
ASIC has publicly confirmed that it is receiving ever-larger volumes of data each year, with annual volumes expected to reach almost half a million terabytes by 2020 (that’s more than two billion Word documents or about 107,000 high definition versions of the 1987 sci-fi classic, RoboCop). Consistent with these gargantuan figures, ASIC has begun adopting advanced digital forensics tools, such as predictive coding and pattern recognition software, to review, understand, and act upon, information collected through its surveillance and enforcement activities.
Through the execution of its Data Strategy, ASIC will continue to develop its ability to efficiently collect, analyse, and use large volumes of data in its surveillance and enforcement activities. With that ability, regulated firms can reasonably expect ever-broader information requests from ASIC and to have information already given to ASIC scrutinised with greater speed and precision.
Expect to see continued competition law scrutiny of financial services in 2018. This continues to be an area attracting investigations and enforcement action by competition law regulators worldwide and we are increasingly seeing the Australian Competition and Consumer Commission (ACCC) getting in on the action.
As part of the 2017-18 Budget, the Federal Government announced funding for the ACCC to establish a dedicated Financial Services Unit to investigate competition law matters in financial services. The ACCC intends for the Financial Service Unit to undertake market studies (similar to the current investigation into residential mortgage products) and report regularly on emerging issues and trends in the sector.
The Government has also tasked the Productivity Commission with conducting an inquiry into competition in Australia’s financial system. The Productivity Commission’s final report is due by July 2018. The ACCC expects that this work may result in further matters being referred to its dedicated Financial Services Unit for investigation.
The recent introduction of new prohibitions against "concerted practices" and misuse of market power also represents a key competition law risk area for financial services. The prohibition on concerted practices is intended to fill a perceived gap in Australia’s competition law by addressing anti-competitive coordination between competitors that falls short of an “arrangement or understanding”. This increases the risks of information sharing between competitors which can be a tricky compliance area for financial services given that inter-bank trading and collaboration with competitors (eg, joint lending and underwriting) necessitates information sharing. The amendment of Australia’s misuse of market power laws to include a “substantial lessening of competition” test also increases competition law risks for financial services firms operating in concentrated markets and may require a new approach to assessing certain strategic initiatives.
The ACCC has also set up a dedicated “Substantial Lessening of Competition Unit” to investigate and litigate suspected contraventions of these new prohibitions. The ACCC has said publicly that it considers these amendments to the law will significantly improve its capacity to tackle anti-competitive conduct in the financial services sector, due to the concentrated nature of financial services markets.
Responsible lending stays in the cross-hairs
We do not expect to see a slow up in ASIC’s close scrutiny of responsible lending in 2018. ASIC has followed through on its promise, and over the past 12 months has ramped up its focus on compliance with the consumer credit responsible lending obligations. It has done so using a multi-faceted approach, which has included:
- conducting targeted industry surveillance of certain sectors and products;
- banning individuals engaging in dishonest conduct in the provision of consumer credit;
- securing the use of enforceable undertakings which involve both remediation and ongoing audit and compliance requirements; and
- pursuing pecuniary penalties in court proceedings.
The responsible lending obligations are onerous, particularly in view of the practical reality that often third party intermediaries are involved, credit providers are large and the lending process is commonly, and often necessarily, disaggregated among divisions.
In past years ASIC’s focus has been upon to clarify the legal obligation by pursuing legal action against relatively small credit providers. However, its recent actions signal an intention to set its sights on the big end of town, with mortgage brokers, credit card issuers and providers of home loans, firmly the subject of ASIC’s attention.
The adoption of an overly strict approach to the obligations may lead to a reduction in the availability of consumer credit. This may have unintended consequences for the broader community, many of whom are either no longer able to obtain credit, or who may only be able to do so at a higher cost.
Either way, this area of regulatory focus looks set to be one in which considerable activity is likely in the months ahead.
Non-bank? New worries
The government is expanding APRA’s powers, and fast. One area which it may soon have extended powers is with respect to lending by non-Authorised Deposit-taking Institutions (ADIs). The proposed Treasury Laws Amendment (Non-ADI Lender Rules) Bill, if passed, will give APRA new powers to make rules, issue directions to non-ADI lenders where a rule has or is likely to have been contravened, and collect data from non-ADIs. A corresponding penalty power will also be introduced to sanction non-ADIs where they fail to comply with APRA’s direction. These new APRA powers have been proposed in order to address perceived financial stability risks associated with non-ADI lenders.
These powers may be exercised by APRA where it forms the view that activities of non-ADI lenders are a material risk to the stability of the Australian financial system. Non-ADI lenders are likely to be regulated (if at all) in a manner that is different to ADIs. Conceivably, however, and by way of example, this could take the form of ensuring that non-ADI lenders have appropriate liquidity to ensure that they can meet short term liabilities, to minimise the risk of any default in making a payment.
The kinds of rules and the frequency with which APRA will make them will likely vary. This flexibility will be key for APRA and is an important feature of the Bill. In the coming year, if the legislation comes into effect, APRA’s use of discretion will be impacted by ASIC’s stance on lending activities, given ASIC is responsible for matters which traverse non-ADIs’ activities, including responsible lending obligations.
The stated focus on stability of the financial system, and APRA’s limited data on non-ADI lenders, mean that APRA is unlikely to make rules or seek penalties in the coming year. The Bill addresses this by expanding APRA’s data collection capacity in respect of non-ADIs. Once such data collection takes place, APRA will form a view on what is required of non-ADI lenders to mitigate such material risks to financial stability and make rules according to that view.
New armour for whistleblowers
We expect to see the whistleblower regime in Australia substantially expanded in 2018.
The long-awaited report of the Joint Parliamentary Committee on Corporations and Financial Services’ inquiry into whistleblower protections was published in September 2017 and was followed shortly after by draft proposed legislative amendments to the Corporations Act 2001 (Cth).
These developments take place against the backdrop of the Australian financial services and banking industries’ pledge to improve corporate culture. Ensuring bank internal whistleblower policies meet the highest standard of whistleblower protections was one of the six reforms announced by the Australian banking industry in its initiatives to protect consumer interests, increase transparency and accountability, and build trust and confidence in banks.
The proposed legislation does not adopt all the Committee’s recommendations but, if enacted, will provide some additional protections to whistleblowers through changes that would:
- expand the scope of whistleblower protection beyond the Corporations Act;
- give whistleblower protections to a broader class of persons, including former employees, contractors and relatives;
- expand the range of disclosures protected under the Corporations Act (for example, disclosures of conduct which constitutes misconduct or an improper state of affairs or circumstances);
- require public companies and large proprietary companies to have a whistleblower policy and make it available to people who may be eligible to be whistleblowers in relation to the company; and
- impose stringent obligations to maintain the confidentiality of a whistleblower’s identity and makes it easier for whistleblowers to receive compensation by introducing a "reverse onus" of proof.
Undoubtedly, the proposed new regime will foster an environment that can only serve to promote a higher level of reporting of corporate misconduct. The inclusion of former employees, for example, opens the way for employees who have departed a workplace to subsequently, and from a safe distance, blow the whistle. As a result, companies will need to refresh their whistleblower policies as they can expect to see more complaints raised internally and with regulators, and, consequently, more focussed investigations from regulators armed with this information.
Several of the Committee’s further considerations which have not been captured in the draft legislation remain the subject of further consideration.
The Government has established an Expert Advisory Panel which is tasked with considering the Committee’s remaining recommendations including establishing a statutory whistleblower protection authority and developing a rewards-based incentive arrangements (eg a "bounty" system). Watch this space.
Gold teeth (or knuckle-busters) for the watchdogs
The enforcement muscle of the Australian regulators is likely to be bolstered next year, given recent government announcements and Court decisions suggesting that penalties imposed for misconduct ought to be substantially increased and broadened.
The recent release of the ASIC Enforcement Review Taskforce’s Position Paper 7, “Strengthening Penalties for Corporate and Financial Sector Misconduct”, criticises the current penalty regime as being inconsistent with penalties for equivalent Commonwealth and State provisions, and having penalties which are too low and not varied enough to address the range and severity of misconduct and act as a “credible deterrent”.
The Paper puts forward 16 recommendations to address these concerns, including:
- increased maximum pecuniary and imprisonment penalties for criminal offences under the Corporations Act, ASIC Act and the National Consumer Credit Protection Act;
- increased maximum civil penalties for contraventions of these Acts;
- introducing disgorgement remedies in civil penalty proceedings brought by ASIC under these Acts; and
- extending civil penalty consequences to a range of additional conduct, including, for example, failing to provide disclosure and takeover documents or providing defective documents, failing to give a product disclosure statement, unlicensed conduct by financial services providers and financial market operators, failing to comply with client money obligations, and failing to comply with breach reporting obligations.
While these changes would bring ASIC’s pecuniary might closer to that of regulators in the US and UK, Australia will still be well behind in the global penalty space.
ACCC Chairman Rod Sims noted this gap in his speech to the Competition Law Conference in May this year, observing that the penalties imposed in Australia are “stunningly lower” than those in comparable jurisdictions.
Not only will the regulators have higher penalties up their sleeves, they will also be more likely to recover their court costs as a result of the new ASIC industry funding model. The courts are also signalling they may be more willing to accept those higher penalties. Judges in benchmarking rates, foreign currency and anti-money laundering (AML) cases have been leaning towards higher penalties in recent cases, and even suggesting they might ignore an agreed penalty if it seems too low in the circumstances.
Finally, in 2018, Australian financial services licensees and credit licensees will also need to be on the look-out for the introduction of a new ASIC “directions power” and an expanded “banning power” following industry consultation this year by the ASIC Enforcement Review. Given the current appetite of the Federal Government to enhance ASIC’s clout, we would not be surprised to see legislation in these areas before Parliament during the coming year.
This article was written by Luke Hastings (Regional Head of Practice – Dispute Resolution, Australia), Andrew Eastwood (Partner, Sydney), Fiona Smedley (Partner, Sydney), Ruth Overington (Partner, Melbourne), Tony Coburn (Consultant, Sydney), Steven Rice (Special Counsel, Sydney), Sarah Benbow (Senior Associate, Sydney), Simone Fletcher (Senior Associate, Sydney), David Grainger (Solicitor, Sydney), Cassandra Clarke (Graduate, Melbourne), Charlotte Johnstone-Burt (Graduate, Sydney) and Camilla Pondel (Graduate, Sydney).
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020