Dramatically Expanded Powers for ASIC

Introduction

On 18 February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) 2019 (the Act) received royal assent. The Act introduces recommendations made by the ASIC Enforcement Review Taskforce in December 2017. The changes substantially expand ASIC’s powers in relation to investigations. The Act also changes dramatically the AFS licensing regime in Australia by introducing new requirements to obtain an AFSL, increasing reporting obligations, and expanding the grounds upon which an AFSL can be refused or cancelled and on which banning orders can be made. We highlight below a few key changes.

Information intercepts

The Act does not amend the law to allow ASIC to intercept information itself,[1] but extends the circumstances under which interception agencies can share information they obtain with ASIC. This means intercepted information can be provided to ASIC where the information ‘relates or appears to relate, to a serious offence that ASIC can investigate’.[2] Further still, this change has a retrospective effect; ASIC will have access to interception information that interception agencies held before the new law commenced.[3]

Search warrants

Under the new law, ASIC can apply for search warrants under the Crimes Act 1914 (Cth). The circumstances under which ASIC can apply include a suspected contravention of what would be an indictable offence under, among others, the Australian Securities and Investments Commission Act, and the Corporations Act 2001 (Corporations Act), or where it appears that a law of the Commonwealth, State or Territory concerning the management of a body corporate has been contravened and that contravention involves fraud or dishonesty and would be an indictable offence. ASIC will be able to search and seize evidentiary material, use it to perform its functions and duties and exercise its powers, including preventing and investigating breaches of ASIC administrated legislation, prosecuting breaches, and taking administrative action

ASIC is also no longer required to specify the books or material that can be searched and seized when applying for a search warrant, potentially broadening their information-gathering power to offences outside the investigation to which the warrant relates.

The way in which seized material can be used is expanded as well; a Commonwealth officer or constable may make seized evidence available to ASIC for the performance of its functions, including instigating various civil and administrative proceedings.

Licencing

The previous requirement for the grant or holding of an AFSL, that ASIC have no reason to believe that an application is not of ‘a good fame or character’, has been amended to a ‘fit and proper’ person.[4] The new ‘fit and proper’ test applies to controllers of an applicant.[5] It also applies to applications to vary a licence.[6] The Act also provides that the ‘fit and proper’ an ongoing requirement to be met by ‘licensees, controllers and officers of those entities’.[7]

To regulate the commoditising or, what is commonly known as ‘warehousing’ of AFSLs, licensees must now commence the financial activities covered by their licence within 6 months of the grant of the AFSL. ASIC is entitled to cancel the licence if it is not traded on within this period. New s 912DB requires a licensee to notify ASIC if this does not occur. New s 912DA imposes an obligation on an entity that controls a licensee (such as a holding company or majority shareholder) to notify ASIC when they start or stop controlling the licensee.

Banning orders

New s 920B of the Corporations Act makes clear that a banning order under that section is capable of being extremely prohibitive. Banning orders can prevent a person from providing financial services, controlling (whether alone or in concert) an entity that provides financial services, or performing any function involving the carrying on of a financial services business (this covers being an employee or a director).

ASIC is also being given new grounds upon which banning orders might be made. Old sub-s 920A(1)(d) (entitling ASIC to issue a banning order if it had reason to believe a person is not of good fame or character) will be modified to suit the new ‘fit and proper person’ criterion. Subsection 920A(1)(d)(a) will be expanded; whereas before ASIC could issue a banning order only where it believed that a person was not competent or trained to provide financial services, it now allows ASIC to issue a banning order if it has reason to believe that the person is not trained or competent to be a director of or be in control of an entity that carries on a financial services business.

ASIC will also be entitled to issue a banning order if a person has been twice linked to a refusal or failure to give effect to an AFCA determination (new s 920A(1)(j)).

False and misleading statements

The Act amends existing provisions about false or misleading statements in s 1308 of the Corporations Act. The amendments describe circumstances in which a document is false or misleading under s 1308. It is now a strict liability offence for ‘failing to take reasonable steps’ under this section. This means a person commits an offence if a statement or omission causes a document to be materially false or misleading and reasonable steps were not taken.[8] The amendments have also removed the ‘safe-harbour’ defences under s 1308(10)-(13),[9] introduced new civil penalty provisions[10] and re-written provisions previously contained in 1308(6), (7) and (9).[11] Note that the amendments apply to AFS licence applications made, but not granted, before commencement,[12] and apply to all existing credit licensees on and after commencement.[13]

O’Loughlin Westhoff

The Act is no doubt the first of many shockwaves of the Hayne Commission. We are able to guide licensees in navigating this new tumultuous landscape. O’Loughlin Westhoff is able to assist you in minimising your regulatory risk and we specialise in engaging with ASIC during the pre-investigation, information-gathering, and litigation phases of an ASIC dispute.

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This is a broad summary of recent legislative changes and is not intended as legal advice and should not be used as a substitute for legal advice

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[1] Explanatory Memoranda, Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Bill 2019 [3.15]

[2] Ibid [3.14]

[3] Ibid [3.24]

[4] Ibid [4.5], [4.22].

[5] Ibid [4.32].

[6] Ibid [4.90].

[7] Ibid [4.96].

[8] Ibid [4.135].

[9] Ibid [4.130].

[10] Ibid [4.132].

[11] Ibid [4.138].

[12] Ibid [4.175].

[13] Ibid [4.176].