As news breaks of the banking and financial services industry deceiving customers and regulators, we chat to Dr Tom Middleton, author of ASIC Corporate Investigations and Hearings, about the powers of the Commission to refer those suspected of deliberate rip-offs for enforcement action – at any time during the Commission’s inquiry.
There’s a yawn factor when yet another Royal Commission is announced. For many it’s seen as a costly, political device to divert attention from the real issues. And for others it’s a toothless tiger whose recommendations will gather dust in filing cabinets.
However, the truth is something different. Legislatively, Royal Commissions are robust, muscular beasts with teeth. So, practitioners whose clients may need to appear before the Royal Commission, will need to be ready for it to bite.
The Royal Commission can act – and act at any time
The Royal Commissions Act 1902 (Cth) (the Act) that authorises the Federal Government, through the Governor-General, to initiate this inquiry is bristling with powers that enable the Royal Commission to inquire into and report upon any matter specified in the Letters Patent and refer any suspected contraventions to the regulators for enforcement.
“Under s 6P of the Act, the [Royal] Commission can, if it thinks it’s appropriate, refer any misconduct to the relevant regulator responsible for that area of law, such as the ATO, ASIC, APRA or the ACCC,” explains Dr Tom Middleton, Associate Professor in the School of Law, James Cook University, Townsville and author of Thomson Reuters’ ASIC Corporate Investigations and Hearings.
“So the regulators don’t need to wait for any final report, the Royal Commission can refer a suspected contravention of the law to a regulator for action at any time during the course of the inquiry.
“Particularly something that’s urgent, that needs a quick response, for example when ASIC needs to act to stop money being transferred out of the country by the defendants.”
Royal Commission pre-empts compensation claims
The Royal Commission has dashed the hopes of many alleged victims of misconduct that it can order defendants to pay compensation to them, by stating on the front page of its website that it “cannot resolve individual disputes. It cannot fix or award compensation or make orders requiring a party to a dispute to take or not to take any action”.
True, it can’t do any of these things itself, but it fails to explain it can refer at any time cases that it considers appropriate for enforcement action or consideration to the relevant regulator. For example, it can refer any suspected misconduct in the financial services sector to the Australian Securities and Investments Commission (ASIC) which has a swag of enforcement powers to deal with the disputes or claims.
ASIC – one of the Royal Commission’s enforcers
What the Royal Commission lacks in enforcement powers is supplemented by its octopus of enforcers. Conversely, the Royal Commission has freer rein than enforcers, such as ASIC, to investigate complaints and compel witnesses to attend the Royal Commission and give answers under oath – without needing the initial threshold suspicion that’s a statutory requirement for, and can hamper, ASIC’s ability to initiate formal investigations.
Dr Middleton explains that under s 13(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), ASIC has to reach a threshold of suspicion, to show that ASIC has “reason to suspect” that a contravention “may have” occurred and needs investigating. The Royal Commission doesn’t need to meet this threshold, allowing it to investigate complaints without the statutory burden that applies to and restricts ASIC. There are added advantages.
“Rather than ASIC spending its funding on its own investigations, the [Royal] Commission can release its findings to ASIC which can then decide, on the basis of that information, whether to commence enforcement proceedings in relation to that matter.
“In some ways that may save ASIC’s investigation budget. However, the information released by the Royal Commission may result in increased enforcement activity or litigation by ASIC which may require additional funding.”
ASIC’s “enforcement pyramid”
So what actions can ASIC take in relation to matters that the Royal Commission refers to it?
The so-called enforcement pyramid (actually a triangle) is a strategic structure of sanctions available to ASIC, ranging from the persuasion-focused resolution methods at the base to the big-gun sanctions at the apex. The idea is that, psychologically, defendants see the penalty path and sanctions ahead, and comply early. Evidential and procedural complexity and the associated costs and delay increase as the enforcement response escalates up the pyramid.
Back to the Royal Commission. If a suspected contravention is revealed in evidence through a voluntary submission or a witness summoned to appear, the Royal Commission can refer that suspected misconduct to any agency or government department under s 6P of the Act (see above).
If the suspected misconduct were referred to ASIC, there are several courses of action available to it under the pyramid referred to above, which aren’t available to the Royal Commission.
The Royal Commission: enforcement by referral
Over to Dr Middleton who explains ASIC’s enforcement options in detail.
1. Administrative/non-judicial proceedings
These proceedings are at the base of the enforcement pyramid. For example, ASIC can ban persons from operating in the financial services industry where they’ve breached the financial services laws (including a failure to meet the “fit and proper person” or “good fame or character” requirements). The individuals are afforded a hearing at ASIC’s office. After that hearing, ASIC may make a banning order. There’s no court, it’s a quick result.
ASIC may also obtain enforceable undertakings in relation to suspected contraventions of the financial services laws whereby persons undertake to ASIC to comply with ASIC’s requirements thereby achieving the relevant regulatory objective without the need for more protracted and costly court proceedings.
2. Civil proceedings
Where victims have suffered losses as a result of the contraventions, ASIC may seek court orders requiring the defendants to pay compensation to those victims.
ASIC can also apply to the court for “asset preservation orders” or “interim injunctions” to stop the defendants transferring assets out of the country so that those assets are available to meet any future compensation orders made by the court.
3. Civil penalty proceedings
ASIC can apply to the court for “disqualification orders” against directors to prevent those directors from managing corporations for a specified period. These orders are designed to both protect the public (by removing that director from the control of public funds) and punish those directors for their conduct (by depriving them of the right to earn a living as a corporate manager for a specified period).
ASIC can also ask the court to impose a pecuniary penalty against those directors of up to $200,000 for each contravention.
4. Criminal proceedings
This is the last resort, at the apex of the enforcement pyramid. These are lengthy and costly proceedings involving the most egregious or serious misconduct, requiring a jury trial and a higher standard of proof (of beyond reasonable doubt) than in civil/civil penalty proceedings. Criminal proceedings are reserved for cases that involve the “fault elements” of a criminal offence, such as where the accused has acted recklessly or with intentional dishonesty.
In some cases, ASIC may pursue defendants at multiple levels of the enforcement pyramid in order to achieve its regulatory objectives, including protecting the public, promoting personal and general deterrence and compliance, and promoting public confidence in the integrity and effectiveness of the regulatory laws.
It’s an easy and not un-cheesy analogy to picture the Royal Commission as a beating heart pumping referrals to its regulatory organs. For those submitting their complaints to the Royal Commission, this may be a salutary metaphor. For the practitioners representing them, this will come as a warning.
The Royal Commission form guide
- The Royal Commission was announced by the Prime Minister the Hon Malcolm Turnbull MP on 30 November 2017.
- It’s presided over by former High Court judge, the Hon Kenneth Madison Hayne AC QC.
- The Letters Patent appointing the Royal Commission and listing its Terms of Reference were signed by the Governor-General Sir Peter Cosgrove AK MC (Ret’d) on 14 December 2017.
- The Letters Patent require the Royal Commission to release an interim report no later than 30 September 2018 and a final report no later than 1 February 2019.
- Three Practice Guidelines have so far been issued by the Royal Commission regarding “Procedures establishing the conduct of the Royal Commission,” “Procedures for leave to appear and witnesses” and “Procedure for making a claim of legal professional privilege”.
- And it’s all governed by the Royal Commissions Act 1902 (Cth).
In part two of this Royal Commission article series, we will alert practitioners to the issues to be considered for clients who submit evidence voluntarily, and the rights accorded to witnesses appearing before the Royal Commission, including the protections afforded to employees/whistleblowers.
About Dr Tom Middleton
Dr Tom Middleton is an Associate Professor in the School of Law, James Cook University, Townsville. He is admitted as a Solicitor of the Supreme Court of Queensland.
He earned a Bachelor of Commerce and a PhD from James Cook University, and a Bachelor of Laws (Hons) and a Masters Degree in Legal Practice at Queensland University of Technology.
In 1999, he wrote a two-volume book (looseleaf and online service) entitled ASIC Corporate Investigations and Hearings, published by Thomson Reuters. He currently updates this book five times per year and it has been in continuous publication for the past 18 years. It is the leading publication for legal practitioners in relation to the Australian Securities and Investments Commission’s investigative and enforcement powers.
He has published numerous refereed articles and a number of these have been cited by the Courts, Academics and Law Reform Commissions in Australia and New Zealand. Those articles have also been utilised by government agencies including the Commonwealth Treasury in the context of proposals for law reform.
He is a foundation staff member in the School of Law and he currently teaches third and fourth year law subjects in both Townsville and Cairns.
