The ASIC Enforcement Review has released Position and Consultation Paper 8 – ASIC’s Directions Powers. This is considering reform to the existing financial services and credit licensing regimes by giving ASIC the power to direct financial services or credit licensees in the conduct of their business where it is necessary to address or prevent compliance failures.
Enforcement would take place through ASIC’s application for a court order to enforce the direction and take administrative action if an AFS or credit licensee fails to comply
When ASIC grants a licence, it can require that a licensee put in place internal systems or restricts its activities in appropriate ways. However, after a licence is granted, ASIC’s existing powers to modify an AFS or credit licensee’s ongoing systems and conduct after the relevant licence has been granted, include to:
- vary, suspend or cancel the licence if ASIC can establish the licensee has breached the law, and the breach justifies this action;
- apply to the court for an injunction; or
- negotiate an enforceable undertaking with the licensee
Three shortcomings have been identified in the above:
- the resources and procedural requirements necessary to impose additional conditions, or to suspend or cancel a licence can result in delay between concerns arising and ASIC achieving a protective outcome.
- applying to a court for an injunction involves significant time, resources and costs in investigating and preparing a case to the required standard to commence court proceedings.
- enforceable undertakings must be agreed to by a licensee and are generally negotiated as an alternative to ASIC exercising its administrative powers or initiating court proceedings. This requires acknowledgment by the licensee of ASIC’s concerns. The outcome also depends on the strength of the evidence available to support ASIC’s concerns and the nature of the alternative remedies that could be pursued by ASIC.
Particular difficulties arise where a licensee has taken some steps to rectify identified compliance concerns but ASIC remains concerned that those steps are not sufficient to ensure that there will not be further breaches by the licensee of its obligations or additional measures are required to ensure that the impact on clients or former clients is identified and, where necessary, remediated.
The Taskforce considers that, to the extent practicable, ASIC should be able to require compliance with AFS or credit licence obligations in real time, and that ASIC should be given powers to direct licensees to take or refrain from taking actions where appropriate for this purpose
SUMMARY OF THE PROPOSED CHANGES
Position 1: ASIC should have the power to direct financial services or credit licensees in the conduct of their business where necessary to address or prevent compliance failures. This would involve directing an AFS or credit licensee to:
- Cease appointing Authorised Representatives (ARs)
- Cease accepting new clients
- Engage in a review/audit of an AR’s records
- Hire properly qualified compliance staff
- Cease transferal of business to another licence
- Stop making specific representations about financial products or services
- Appoint an ASIC-nominated person to review and report on compliance processes
- Establish a programme to assess claims for restitution or compensation to customers
The power for ASIC to give directions would not replace or reduce the existing utility of enforceable undertakings and other negotiated agreements between ASIC and licensees.
The power would instead support the effectiveness of negotiated outcomes while clarifying the scope of ASIC’s powers for licensees and consumers.
Position 2: The directions power should be triggered where ASIC has reason to believe that an AFS or credit licensee:
- has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes, or would constitute a contravention of financial services laws or the credit legislation (as defined in s761A of the Corporations Act and s5 of the Credit Act respectively); or
- has refused or failed, is or is proposing to refuse or fail to do an act or thing that the legislation requires a financial services or credit licensee to do.
The legislation will broadly define the circumstances in which the power to make a direction will be enlivened to provide clarity for licensees.
Another option (which whilst raised, is not the Taskforce’s recommendation) would be to identify public interest considerations or objectives as a basis on which a direction could be made by ASIC e.g for purposes aligned to its objectives as set out in section 1 of the ASIC Act. Relevantly, this might include to:
- maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy;
- promote the confident and informed participation of investors and consumers in the financial system;
- administer laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and
- take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.
This would maximise ASIC’s flexibility at the expense of clarity for licensees, which could create uncertainty and ultimately impact on a licensee’s perception as to the appropriateness of a direction made and preparedness to comply.
Position 3: ASIC should be able to apply to a court to enforce the direction and take administrative action if an AFS or credit licensee does not comply with a direction. It is proposed that the process would involve the following:
- before making a direction ASIC would provide the licensee with notice setting out its intention to make a direction, reasons and a reasonable period for the licensee to respond. A ‘reasonable’ period of time for a response will depend on the circumstances of the case and should consider the need for urgent action in some cases;
- if the licensee’s response inadequately addresses ASIC’s concerns, then ASIC may make a direction;
- when making the direction ASIC should set out its reasoning and a time frame for compliance that is reasonable in the circumstances.
If the licensee fails to comply with the direction, ASIC could apply for a court order requiring compliance.
In addition, a failure to comply could be a breach of a financial services law or credit legislation which would enliven ASIC’s administrative powers to take licensing action, including suspending, cancelling or imposing conditions on the licence and/or to make a banning order.
The Taskforce’s preliminary view is that a failure to comply should not also be a criminal offence, however it seeks views on this.
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