ASIC Under Fire: Senate Committee Calls for Major Overhaul of Corporate Regulator


Published: July 05, 2024

In a scathing report released today, the Senate Economics References Committee has called for a complete overhaul of the Australian Securities and Investments Commission (ASIC), citing a "comprehensive failure" in the regulator's ability to fulfil its mandate. The report, which comes after a nearly two-year inquiry, paints a picture of a regulator struggling with an overly broad remit, inadequate enforcement practices, and governance issues.

The committee's findings and recommendations, if implemented, could lead to the most significant shake-up of Australia's corporate regulatory landscape in decades. Here's a breakdown of the key issues identified and the changes proposed:


ASIC's Regulatory Remit: Too Broad to Be Effective

One of the most striking recommendations in the report is the suggestion that ASIC's current structure may be fundamentally flawed. The committee found that ASIC's regulatory responsibilities have expanded to such an extent that the organization is unable to effectively carry out its duties.

"ASIC's remit has become so large that it now uses significant resources just to strategically prioritise its regulatory efforts," the report states. This expansion of responsibilities has not been matched with a corresponding increase in resources or capabilities, leading to what the committee describes as a "capacity constrained" regulator.

The committee's solution? A potential split of ASIC's functions into two separate entities: a companies regulator and a financial conduct authority. This radical restructuring would aim to create more focused and effective regulatory bodies, each with a more manageable scope of responsibilities.

Enforcement: A Call for More Aggressive Action

The report is particularly critical of ASIC's approach to enforcement, suggesting that the regulator has been too lenient in its handling of corporate misconduct. The committee found that ASIC's current practices have led to a situation where breaking the law is often treated as a "calculated risk" by corporations, with penalties viewed merely as a "cost of doing business."

To address this, the committee recommends that ASIC or its successor bodies should prioritize litigation for all serious suspected breaches of corporations law. This would mark a significant shift from ASIC's current approach, which often favors negotiated outcomes and enforceable undertakings over court action.

The report also calls for greater transparency in ASIC's enforcement processes. It recommends the establishment of a searchable public register of civil and criminal outcomes arising from reports of alleged misconduct, similar to the approach taken by the US Consumer Financial Protection Bureau.

Handling of Misconduct Reports: A Black Hole of Inaction

One of the most concerning findings of the report relates to ASIC's handling of reports of alleged misconduct. The committee found that the vast majority of these reports result in no further action by ASIC, with many seemingly disappearing into a regulatory black hole.

In the 2022-23 financial year, for example, 63% of misconduct reports resulted in no further action by ASIC, while only 14% were referred for further action. This high rate of inaction has led to significant frustration among those who report misconduct, and potentially allows harmful corporate behavior to continue unchecked.

To address this issue, the committee recommends making it a legislative requirement for ASIC or future regulatory authorities to investigate reports of alleged misconduct at an appropriate rate. It also calls for the development of consistent standards for reporting data on the handling of misconduct reports, and the establishment of service standards to ensure those who submit reports receive clear and timely information about the actions taken in response.

Governance and Accountability: A Need for Cultural Change

The report identifies significant issues with ASIC's governance structure and internal culture. It describes ASIC's current governance arrangements as a "Swiss cheese" approach, with overlapping pieces of legislation leading to confusion and a lack of clear accountability.

To address these issues, the committee recommends a review of ASIC's governance structure, potentially moving to a model with a single statutory appointee as Chair/CEO rather than the current commission structure. It also calls for the implementation of a legislated code of conduct for ASIC's Chair and other statutory appointees, with clear sanctions for breaches of this code.

The committee expresses particular concern about the accountability arrangements for ASIC Commissioners, noting that there are currently limited options for addressing misconduct short of termination. It recommends the development of a more graduated system of accountability measures.


Whistleblower Protection: Incentivizing Integrity

Recognizing the crucial role that whistleblowers can play in exposing corporate misconduct, the committee recommends significant enhancements to Australia's whistleblower protection laws. Specifically, it calls for the introduction of financial incentives for whistleblowers who make substantiated disclosures, particularly in cases where addressing the misconduct would result in a significant public benefit.

The committee also recommends establishing a financial compensation mechanism for whistleblowers who experience significant personal detriment as a result of their disclosures, such as loss of career prospects. These changes aim to create a more robust system for encouraging and protecting those who speak out against corporate wrongdoing.

Funding and Resources: A New Model Proposed

The report identifies ASIC's funding model as another area in need of significant reform. The current Industry Funding Model (IFM), which recovers much of ASIC's regulatory costs from industry participants, came under particular criticism. The committee found that the IFM was inequitable, opaque, and potentially counterproductive to ASIC's regulatory objectives.

To address these issues, the committee recommends a reassessment of ASIC's funding arrangements. It suggests that a greater level of funding should come directly from the proceeds of regulatory fines, including court fines, penalties, and infringement notices. This approach aims to create a more direct link between enforcement actions and regulatory funding, while potentially reducing the burden on compliant industry participants.

The committee also recommends ensuring that any regulatory authorities are accountable for the level of resourcing linked to cost-recovered activity, and face obligations to rationalize surplus resourcing to reduce costs on industry subsector participants.

Technological Capabilities: Playing Catch-Up

The report highlights significant concerns about ASIC's technological capabilities, particularly in relation to data analytics and the use of emerging technologies like artificial intelligence. The committee found that ASIC has fallen behind the industries it regulates in terms of technological adoption and capability.

While ASIC has recently announced plans to enhance its use of technology, including the launch of a new 'Professional Registers Search' system, the committee suggests that these efforts may be too little, too late. It calls for a more aggressive approach to technological adoption and capability building within the regulator.

Reaction and Next Steps

The release of this report has sent shockwaves through Australia's business and regulatory communities. While some industry groups have welcomed the call for reform, others have expressed concern about the potential disruption that could result from such sweeping changes.

ASIC, for its part, has defended its record while acknowledging room for improvement. In a statement, ASIC Chair Joseph Longo said, "We are committed to continuously improving our performance and effectiveness as a regulator. We will carefully consider the committee's recommendations and work with the government to implement appropriate reforms."

The ball is now in the government's court. Treasurer Jim Chalmers has indicated that the government will give careful consideration to the committee's recommendations. "We are committed to ensuring that Australia has a strong and effective corporate regulator," Chalmers said. "We will review the committee's report in detail and respond in due course."

However, implementing the committee's recommendations would be no small task. The proposed splitting of ASIC into two separate entities, in particular, would represent a major restructuring of Australia's regulatory landscape. Such a change would likely require significant legislative action and could take years to fully implement.

Implications for Australian Businesses

For Australian businesses, particularly those in the financial services sector, the implications of this report could be far-reaching. If implemented, the recommendations could lead to:

  1. More aggressive enforcement action: Businesses may face a higher risk of litigation for suspected breaches of corporations law, potentially leading to more severe penalties for misconduct.
  2. Greater transparency: The proposed public register of enforcement outcomes could make it easier for stakeholders to track a company's regulatory history.
  3. Enhanced whistleblower protections: Companies may need to review and strengthen their internal whistleblowing policies and procedures in light of potential new incentives for whistleblowers.
  4. Changes to regulatory costs: The proposed changes to ASIC's funding model could alter the regulatory costs faced by businesses, particularly if more funding is derived from enforcement actions.
  5. Increased regulatory complexity in the short term: If ASIC is split into two entities, businesses may initially face increased complexity in navigating the new regulatory landscape.

Conclusion: A Turning Point for Corporate Regulation

The Senate Economics References Committee's report represents a potential turning point in Australian corporate regulation. It paints a picture of a regulator that has struggled to keep pace with its expanding responsibilities and the evolving nature of corporate misconduct.

The proposed reforms, if implemented, would represent the most significant overhaul of Australia's corporate regulatory framework in decades. They aim to create a more focused, transparent, and effective regulatory system - one that can better protect investors, maintain market integrity, and hold wrongdoers to account.

However, the path from recommendation to implementation is often long and complex. The government's response to this report, and its willingness to undertake such sweeping reforms, will be closely watched by businesses, investors, and the broader public in the coming months.

What is clear is that the status quo is no longer acceptable. As Australia's economy continues to grow and evolve, it needs a corporate regulator that can effectively meet the challenges of the 21st century. Whether that regulator is a reformed ASIC or a new set of regulatory bodies remains to be seen, but change, it seems, is inevitable.

As this situation develops, Australian businesses would be wise to stay informed about potential regulatory changes and consider how they might need to adapt their compliance and governance practices in response. In an era of increasing scrutiny and potentially more aggressive enforcement, a proactive approach to corporate governance and regulatory compliance will be more important than ever.

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