New law increase penalties for corporations and financial services breaches

It is fair to say that 2018 was the year of the Financial Services Royal Commission (Royal Commission). Well, at least it was for the financial services sector and legal industry. One of the key recommendations made in the final report of the Royal Commission was that the Australian Securities and Investments Commission’s (ASIC) approach to enforcement should be to first ask the question “whether a court should determine the consequences of a contravention”. This in turn has led to ASIC’s new regulatory and enforcement posture of “why not litigate”.

This stance will no doubt be reinforced with the new penalties and powers that are now available to ASIC under the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Act). We have previously reported on the bill¹ to this Act which introduces new maximum penalties for corporate and financial sector misconduct under the Australian Securities and Investments Commission Act 2001 (ASIC Act), Corporations Act 2001 (Cth) (Corporations Act) and the National Consumer Credit Protection Act 2009 (Credit Act) (click here).

The majority of the new provisions under the Act came into effect on 13 March 2019 and they will not have retrospective effect. This means that the new provisions will only apply to offences or contraventions that occur since the commencement of the Act.

The key new changes

Increase to penalties for criminal offences

The Act increases the penalties for certain criminal offences under the Corporations Act, ASIC Act and the Credit Act, including by:

• Increasing the maximum imprisonment penalties for a number of criminal offences to a maximum of 15 years;
• Introducing a formula to calculate financial penalties for criminal offences;
• Imprisonment has been removed as a penalty for all strict and absolute liability offences and in turn the following increased financial penalties will apply:
  • where an offence imposes a fine as the only penalty, if contravened by a body corporate, the fine will be multiplied by 10;
  • where an offence provides a term of imprisonment of 10 years or more, the financial penalty will be the greater of:
    • for individuals, the greater of 4,500 penalty units ($945,000) per contravention or 3 times the benefit derived and detriment avoided² from the conduct; and
    • for companies, the greater of 45,000 penalty units ($9.45m), 3 times the value of the benefit derived and detriment avoided from the conduct or 10 percent of the annual turnover of the corporation for the 12 month period ending at the end of the month in which the body corporate committed, or began committing, the offence (this will be capped at $525m); and
• Introducing ordnary criminal offences that sit alongside strict and absolute liability offences. According to the Revised Explanatory Memorandum to the Bill this is intended to address a situation where the individual commits both the physical and fault elemens of an offence³. If the fault element can be established, a higher penalty is imposed.

Expanding the civil penalty regime

In addition, the Act introduces a civil penalty regime for corporates and financial service licensees for certain contraventions which now become subject to civil penalties. The more significant of these include:

• The general obligations for financial services licencees under s912A of the Corporations Act (to do all things necessary to ensure financial services are provided efficiently, honestly and fairly);
• Requirement on financial services licencees to notify ASIC of certain matters as set out in s912D of the Corporations Act (breach reporting obligations); and
• Obligations to disclose documents or statements as set out in s952E (disclosure must not be of defective document or statement) and s952H (financial services licensee failing to ensure authorised representative gives disclosure documents or statements as required) of the Corporations Act.

Infringement Notices

The new legislation also expands the current infringement notice regime. ASIC can now issue an infringement notice for all strict and absolute liability offence in the Corporations Act, other prescribed offences in the Corporations Act and prescribed civil penalty provisions in the Corporations Act.

ASIC can issue an infringement notice if it reasonably believes the person has contravened a provision subject to an infringement notice. The infringement notice has to be issued within the 12 months after the alleged contravention took place. If the person has contravened both a civil penalty provision and an offence provision, the infringement notice must be issued in relation to the offence provision.

Other changes

Some of the other changes brought in by the Act that are worth mentioning include the following:

• Under the Corporations Act, the courts are now to give priority to compensating victims over ordering the payment of financial penalties where a defendant would not be in a financial position to pay both the penalty and compensation⁴;
• Section 184 of the Corporations Act was previously contravened if an officer of a corporation used their position or information known to them to gain an advantage for themselves or someone else, or cause a detriment to the corporation. Section 184 of the Corporations Act can now be contravened even when the relevant corporation does gain an advantage from the contravention;
• There will also be a new test for dishonesty as it appears in the Corporations Act. The term “dishonesty” is now defined to mean “dishonest according to the standard of ordinary people”.

Where to from here

Importantly, the changes introduced by the Act will mean that ASIC will be able to seek harsher civil and criminal penalties against banks, their executives and others who breach corporate and financial services law. This position was also expressed by ASIC’s Deputy Chair, Daniel Crennan QC.

It is important for those in the financial services sector to be cognisant of these new changes and what they could ultimately mean for both individuals and corporations in the event that ASIC does pursue breaches of the Corporations Act, ASIC Act and/or Credit Act.

Lastly, the new section 1317QA of the Corporations Act introduced by the Act provides that each day a licensee, who contravenes a civil penalty provision, fails to do an act or thing to be done within a particular period of time or by a particular time, commits a separate contravention. This means that, for example, if reporting obligations under s912D of the Corporations Act are not complied with, as a new civil penalty provision, this could carry a maximum penalty of up to $525m for each contravention. Whilst we think the Courts will only order maximum penalties in the most egregious cases, the provisions have significantly strengthened the regulatory enforcement regime paving the way for ASIC to pursue the imposition of higher penalties.

This article was written by Jonathan Kramersh, Partner and Vesa Prekazi, Senior Associate in our Melbourne office.

Publication Editor: Grant Whatley

¹ Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Bill).
² as defined in ss1311D and 1317GAD of the Act.
³ For example s989CA (audit t be conducted in accordance with auditing standards) of the Act.
⁴ This is the current position under the ASIC Act and Credit Act.