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Dissecting ASIC's enforcement approach after conspicuous omission

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Has the corporate regulator gone soft? The Australian Securities and Investments Commission (ASIC) may have inadvertently given that impression with the release last week of its annual report outlining the regulator’s priorities for the next four years.

Conspicuously missing from ASIC’s Corporate Plan 2021-25 is the “Why Not Litigate?” discipline that has been a part of the regulator’s enforcement approach since the Hayne royal commission hearings into financial sector misconduct.

The regulator adopted the discipline in October 2018 after copping heavy criticism over its handling of white collar misconduct from Commissioner Kenneth Hayne in his interim report.

In the report, Commissioner Hayne said ASIC’s starting point for responding to errant behaviour and practices appeared to have been guided by “how can this be resolved by agreement?”

As he saw it, it wasn’t the right way to protect financial services consumers from harm.

“This cannot be the starting point for a conduct regulator,” Commissioner Hayne said.

In his final report in 2019, he said “the starting point for consideration is, and must always be, that the law is to be obeyed and enforced”.

He recommended that ASIC adopt an enforcement approach that takes as its starting point, the question of whether a court should determine the consequences of a contravention.

Since then, the “Why Not Litigate?” discipline has appeared in the last two ASIC corporate plans, 2019-23 and 2020-24.

Now that it no longer appears in the regulator’s work plan, it is legitimate to ask if ASIC, which is tasked with policing the financial services sector, is returning to its pre-Hayne ways.

If you go with the take of one business daily publication, the omission of the discipline represents a shift away from the regulator’s confrontational war-footing following the criticism it received from Commissioner Hayne.

A large part of the answer may be found in responses provided by new ASIC Chairman Joseph Longo to the Parliamentary Joint Committee on Corporations and Financial Services during a June 18 public hearing.

It was Mr Longo’s first appearance before the committee since he started his five-year tenure on June 1 and one committee member asked if he was planning a change in enforcement approach.

Mr Longo's advice was to continue to expect “an active approach to enforcement”.

He was also asked if “Why Not Litigate?” remains in the frame at ASIC going forward and the new ASIC boss – a former banking lawyer tapped by the government to replace James Shipton – explained what the concept means under his stewardship.

“I think we all need to be reminded that what we’re really talking about is active, credible, targeted law enforcement, and to my mind that’s what we’re about, and that’s not going to change,” Mr Longo said,

Mr Longo told the committee that that not every matter is going to end up in court and that there will be times when ASIC will not take any action because it doesn’t require or warrant action being taken.

“But what I want to reassure the committee about is that our commitment to enforcement isn't going to change,” Mr Longo said. “The critical question is what enforcement? What cases do you run? What investigations do you launch? They’re the critical questions.

“I can reassure the committee, then, that we intend to continue to be an active litigant in furtherance of those objectives.”

So, while “Why Not Litigate?” no longer appears in ASIC’s corporate plan, it’s too early to jump to the conclusions that ASIC is about to go weak on white collar breaches and bad practice.

As ASIC Commissioner Sean Hughes explains in a 2019 speech, “Why Not Litigate?” does not mean the regulator has adopted a “litigate first or litigate everything” strategy.

“This would not be appropriate from a discretion perspective nor practical from a resource allocation or cost perspective,” Mr Hughes said.

It is similar to what Mr Longo has said to the committee, explaining why there will be occasions when the regulator will settle matters based on court outcomes or turn to enforcement undertakings.

“We have a wide toolkit,” he said.

McCabe Curwood Principal Mathew Kaley told insuranceNEWS.com.au the omission of the “Why Not Litigate?” line from the corporate plan is unlikely to signal a significant shift in ASIC’s approach.

He says ASIC outlines in the corporate plan that it “will employ the full scope of [its] regulatory toolkit in a targeted and proportionate way to enforce the law”.

“Taking a targeted and proportionate approach to enforcement seems quite appropriate,” he said.

Finity Principal Raj Kanhai says the “Why Not Litigate?” concept may have served its purpose by sending a message to the industry and that it is timely that things move now to a more sustainable footing.

“A litigation-centric approach to regulatory enforcement cannot be sustainable in the longer term," he told insuranceNEWS.com.au. “Litigation should usually be a last resort mechanism, consistent with model litigant approaches.”

However Consumer Action Law Centre says litigation should be used when it is in the consumer interest.

“It is an important tool for the regulator to deter misconduct and enforce the law,” Director of Policy and Campaigns Katherine Temple told insuranceNEWS.com.au.

Watch this space.