Is ASIC taking the right approach to enforcement?

The last week has seen an outpouring of adviser anger over yet another cost imposed on the profession in the form of the Compensation Scheme of Last Resort (CSLR) levy, which equates to an extra $1,186 per adviser, in addition to the $2,818 they are already paying for the Australian Securities and Investments Commission (ASIC) levy.

The increasing costs, particularly around the retrospective nature of the CSLR levy in relation to unresolved Dixon Advisory complaints, has seen some of this ire directed towards the regulator and its enforcement priorities.

Speaking at The Brief – Open Forum as part of Blockchain APAC’s Policy Week, recently appointed ASIC commissioner Alan Kirkland outlined part of the regulator’s approach.

“We are not afraid to pursue cases where the law might be considered unclear,” Kirkland said.

“In our legislative and judicial system, the courts are the ultimate arbiter of these matters. This approach applies to all sectors under our regulatory remit – and is no different for crypto.”

According to ASIC’s corporate plan, the regulator selects and targets its “enforcement actions to ensure we have the greatest impact on the most serious harms within our remit”.

“When we take enforcement action, our aim is not only to hold individuals and companies to account, but to deter future misconduct – we are determined to achieve outcomes that reverberate across the market,” it says.

“This approach helps promote a culture of compliance across Australia’s financial system and the corporate sector more generally.”

The comments last week from Kirkland, who commenced a five-year term as a commissioner in November last year after 11 years as the chief executive of consumer advocacy group CHOICE, sound like ASIC sees setting a precedent on an emerging asset class as a way to meet its “greatest impact” criteria.

It also signals a willingness for the regulator to take action when the likelihood of success is unclear.

ASIC’s court failures

In just the last two weeks, ASIC has lost two cases in the Federal Court – one over unfair contract terms against an insurance company and one over unlicensed financial services in relation to crypto-asset related products.

This follows a number of higher-profile failures in recent months, such as ASIC failing to overturn a Federal Court finding that the Commonwealth Bank of Australia and Colonial First State did not receive “conflicted remuneration” benefits under a superannuation agreement.

In its August 2023 ruling, the Full Federal Court found Justice Anderson was “correct to conclude the benefits were not conflicting remuneration”.

In addition to dismissing the appeal, ASIC was ordered to pay the costs of the appeal for CBA and CFS.

In November last year, the Federal Court also ordered ASIC to pay the legal costs of James Mawhinney after the corporate regulator failed to make a new case against the Mayfair 101 managing director.

Even in cases where ASIC has been successful, the effectiveness of its actions are unclear.

During a Senate economics references committee inquiry last year, for instance, Senator Andrew Bragg argued the imposed penalty of $7.2 million against Dixon Advisory was insufficient considering the total claims made by customers amounted to over $368 million.

Is ASIC avoiding CDPP referrals?

During the inquiry last year, Bragg pressed ASIC representatives for a more thorough explanation as to why criminal proceedings were not pursued in the Dixon case.

“Well, there is a range of concepts in what you are referring to. ASIC frequently takes civil proceedings against corporate entities, we take criminal proceedings against individuals and on some occasion corporate entities where we have the evidence that will make the criminal threshold,” said deputy chair Sarah Court.

Unlike civil proceedings, work of the Office of the Commonwealth Director of Public Prosecutions (CDPP) is primarily funded through parliamentary appropriations – so increased referrals wouldn’t increase the levy paid by advisers.

Data released by the Senate economics committee in October showed that the number of cases ASIC has referred to the CDPP has more than halved in the past five years.

The CDPP data showed that ASIC made 86 referrals during the 2018–19 financial year compared with 41 referrals in the 2022–23 financial year.

In a media release following the release of the data, Bragg drew attention to what he described as “ugly statistics”.

“These figures signal that ASIC has made Australia a haven for white-collar crime. ASIC has given up on their sole obligation to enforce corporate law,” he said.

The CDPP data also showed that the rate of prosecutions initiated from ASIC referrals dropped from 75.6 per cent in 2018–19 to 19.5 per cent in 2022–23.

Given that ASIC’s corporate plan includes the goal to “deter future misconduct” through its enforcement action, the low level of referrals is a curious figure.

It could be read as the regulator’s prior work reducing the need for criminal action because there is less wrongdoing, however ballooning enforcement costs would suggest financial services is still rife with misconduct.

Paired with the Dixon Advisory case, which has still not warranted a single criminal action despite the scale of consumer harm, it is hard to parse what exactly would prompt a CDPP referral.

Instead, financial advisers will continue picking up the tab for ambitious civil proceedings that deliver no tangible benefit to impacted consumers through the ASIC levy, while also covering the cost of compensation through the CSLR levy.