Recent changes to the law significantly increase the potential maximum penalties that directors can face for offences. In the wake of the Hayne Royal Commission, more proactive and litigious regulators will also be a feature of the enforcement landscape.
Corporate Penalties Bill
Federal parliament has passed legislation that substantially increases the maximum civil and criminal penalties that directors can face for breaches of the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission (ASIC) Act. The new penalties underscore the substantial obligations under the law on directors and officers.
There will be higher civil penalties:
- For an individual, maximum civil penalties increase from $200,000 to the greater of $1.05 million or three times the benefit gained (or loss avoided) from the breach.
- For corporations, maximum civil penalties increase from $1m to the greater of $10.5m, or three times the benefit gained (or loss avoided, or 10 per cent of annual turnover with a cap set at $525m.
- Courts can now make ‘relinquishment orders’ that aims to recover any financial benefit from corporate misconduct.
- Civil penalties have also been extended to new areas of the law, including significant penalties for Australian Financial Services Licence holders who fail to provide services efficiently, honestly and fairly (s912A) or report breaches in a timely manner (s912D).
Maximum prison terms increase from five years to 15 years for serious criminal offences such as:
- Recklessly or dishonestly breaching directors’ and officers’ duties (s184).
- Dishonestly failing to comply with financial and audit obligations (s344(2)).
- Intentionally or recklessly breaching the duties of officers or employees of the responsible entity of a registered scheme (ss601FD, 601FE).
- Knowingly or recklessly providing defective disclosure documents or statements (ss952D, 952F, 1021D).
Maximum prison terms and significant maximum financial penalties have also been introduced for individuals convicted of certain other offences (see AICD website for more detail).
The reforms, first tabled in parliament last October, implement the recommendations of a taskforce review of ASIC enforcement powers. The AICD has strongly supported the review and its recommendations to substantially increase corporate penalties, to act as a more effective deterrent and reflect the seriousness of offences. In February, parliament opted to support opposition amendments that have increased penalties even further than the taskforce recommended.
”There is a focus on both corporate accountability and individual accountability.” ASIC
The ASIC response
In February 2019, ASIC released an update of its planned actions in response to the banking Royal Commission. ASIC reported it has multiple investigations in train relating to the Royal Commission, including 13 specific referrals from Commissioner Hayne, and expects some of these matters to result in criminal prosecutions. It has commenced proceedings in relation to two other case studies and is assessing another 16 case studies to determine whether investigations should be commenced.
ASIC confirmed that since October 2018, it has adopted a “why not litigate” stance on enforcement, which will be supported by a new Office of Enforcement. ASIC reports that one of the office’s guiding principles is “a focus on both corporate accountability and individual accountability, particularly at executive and board level, for breaches of the legislation administered by ASIC”.
ASIC’s enforcement approach is part of a broader change program initiated in 2018. This includes additional commission members and a new leadership structure, a new vision and mission, and changes to governance, structure and decision-making. In addition to adopting a strategy of greater court-based enforcement, it includes the adoption of new regulatory and supervisory approaches, such as Close and Continuous Monitoring.
ASIC has also launched a Corporate Governance Taskforce to review corporate governance practices in large listed entities, with a view to highlighting “good” and “bad” practices observed across these entities. The taskforce will examine a range of issues, including director and officer oversight, executive remuneration and corporate disclosures. This represents a significant shift in regulatory practice, particularly recognising it will involve close oversight of companies that have not been implicated in any misconduct.
”What you will find coming out of that review is an increased appetite to take on coercive tools.” APRA deputy chair John Lonsdale
APRA enforcement review
The Australian Prudential Regulation Authority (APRA) is also reviewing its approach to enforcement in light of the introduction of the Banking Executive Accountability Regime, the APRA Prudential Inquiry into CBA and the Royal Commission’s observations that APRA should develop a stronger appetite for formal enforcement action.
APRA intends to publish a new enforcement strategy soon. It has stated its interest in organisations “not just having a healthy balance sheet, but also strong governance, a sound culture, appropriate internal controls, and clear accountabilities”.
The regulator has appointed an independent committee as “a sounding board”, including former NSW Supreme Court Judge Dr Robert Austin, Professor Dimity Kingsford Smith (Minter Ellison chair of risk and regulation UNSW) and ACCC commissioner Sarah Court.
APRA deputy chair John Lonsdale says, “What you will find coming out of that review is an increased appetite to take on coercive tools and an APRA that is quite explicit.”
At a parliamentary hearing this year, APRA chair Wayne Byres GAICD also highlighted the new penalties and directions powers introduced to the regulation of superannuation trustees, noting these are “game changers” in terms of APRA’s regulatory armoury.