Has the Road to Settlement Gotten Bumpier?

with co-authors Lara Gotti, Kirsten Scott, Jenni Hill

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Banking Royal Commission, or BRC) has been in Australian media headlines since the Commission was established on December 14, 2017. On February 4, 2019, the widely anticipated final report from Commissioner Hayne was released.

While Australian banks were BRC’s focus, international institutions watched with keen interest and made submissions to ensure their voices were heard, anticipating that the resulting regulations for financial institutions would be far stricter and structured.

However, the impact is not limited to the financial sector. Commissioner Hayne recommended a change to the regulators’ enforcement approach, which may transform the perceived soft touch of the country’s principal corporate watchdog, the Australian Securities and Investments Commission (ASIC).

For overseas companies operating in Australia, these changes may impact future engagements with the Australian regulator and the prospects of global settlements where multiple regulators are involved.

The Findings

What did the Commissioner have to say about ASIC’s enforcement culture?

The Commissioner’s underlying theme in considering ASIC’s enforcement measures was that ASIC should always ask “why not litigate?” The Commissioner criticized ASIC’s deeply entrenched culture of negotiating outcomes rather than insisting upon “public denunciation of, and punishment for, wrongdoing” to adequately deter misconduct.

So, will ASIC still consider settlement?

The Commissioner stated, “if ASIC has a reasonable prospect of proving contravention of the law, the starting point for its consideration … must be that the consequences of contravention should be determined by a Court.” This does not mean that negotiated resolutions are prohibited or that ASIC is limited to only civil proceedings that will succeed.

Rather, when ASIC starts enforcement proceedings, the outcome sought “must always be to demonstrate the alleged contravention and have the Court impose a proper penalty.”

Enforceable undertakings (EU), often viewed as a useful settlement tool, are still available. However, the Commissioner recommended that ASIC recognize “the relevance and importance of general and specific deterrence in deciding whether to accept an enforceable undertaking (EU) and the utility in obtaining admissions in EUs.” The Commissioner suggested that ASIC should generally not accept an EU without an acknowledgement by the regulated entity that it has breached specific legislative provisions.

What is ASIC’s Response?

ASIC accepted Commissioner Hayne’s position, indicating that it will implement all 12 non-legislative recommendations. In addition to the 13 specific referrals made to ASIC during the BRC, ASIC has announced that it has a further 12 active investigations and 16 case studies to determine if investigations should be pursued against both banks and their senior executives.

The Road Ahead

While settlements are not off the table, it is likely that they will be harder to achieve. ASIC’s increased cooperation with overseas regulators, as evidenced particularly in the fintech and regtech space, will also need to be considered, as ASIC may no longer be willing to take the lead from more dominant overseas regulatory authorities.

Penalties have also increased tenfold this year. As a result, ASIC has both financial and political incentive to take a far harsher line in relation to suspected breaches. ASIC’s focus on deterrence will mean that, in the financial sector in particular, ASIC will proceed to resolution by litigation, not settlement.

How does this compare to international regulators?

The harsher penalties available to regulators in the U.S. and U.K. are now available in Australia, with a regulator more willing to take the battle to court. ASIC’s response is also in line with other regional regulators, such as the Monetary Authority of Singapore (MAS), which in its Enforcement Monograph published in September 2018, stated that their primary focus was to “achieve deterrence and prevent future harm … adequate to deter the offender from re-offending and also deter others from engaging in similar violations and misconduct.”

It also appears that ASIC will continue to focus on individual accountability of senior managers and the culture of organizations. This is consistent with the approach throughout the Asia-Pacific region, as well as Europe and the United States [see our client briefing MAS issues proposal to heighten senior management accountability, May 2018].