Introduction
In its enforcement and regulatory update of April to June 2022, the Australian Securities and Investments Commission (ASIC) has reiterated its commitment to acting against financial misconduct. The corporate regulator highlighted that it remains an active litigant against misconduct, and will continue to address misconduct to maintain trust and integrity in the financial system.
This has been echoed in ASIC’s most recent corporate plan, which outlines its priorities for 2022-2026. The regulator has signalled it will prioritise (amongst other things) reducing risk of harm to consumers of financial and credit products, increasing its emphasis on supervision and enforcement of governance, transparency and disclosure standards, and protecting consumers with a focus on superannuation products, managed funds and financial advice.
We take a look at some of ASIC’s recent actions, particularly the recent penalties sought by the regulator and imposed on Australian companies by the Federal Court.
The Penalties
ASIC is empowered to pursue civil and criminal penalties under various legislation, including the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
The primary objective of pecuniary penalties in civil proceedings is deterrence, both to deter repetition of the offending conduct by the offender (specific deterrence), and to deter others from engaging in similar offences (general deterrence).
ASIC v Squirrel Superannuation Services
Penalty amount: $55,000 plus $20,000 costs
Calculation: Agreement between parties
On 20 June 2022, the Federal Court ordered Squirrel Superannuation Services Pty Ltd (Squirrel) to pay a $55,000 pecuniary penalty plus ASIC’s costs of $20,000 for false and misleading marketing. On 9,420 occasions between March 2015 and January 2019, Squirrel distributed brochures to members of the public regarding investing in residential property via SMSFs. The brochures contained representations about benefits of investment property through SMSFs, including statements such as ‘residential property doubles in value every 7-10 years’.
The Federal Court’s declarations included that Squirrel’s distribution of these brochures amounted to misleading or deceptive conduct, Squirrel had made false or misleading representations, and Squirrel had engaged in conduct liable to mislead the public, in contravention of ss 12DA(1), 12DB(1) and 12DF(1) of the ASIC Act, respectively.
As the SMSF sector holds an estimated $876 billion of assets, ASIC noted the importance of clear and accurate information being provided to those looking to set up an SMSF, since misleading information can significantly impact the sector.
ASIC v Rent2Own Cars Australia
Penalty amount: $228,000 plus varied costs order
Calculation: Calculated by Court
On 4 May 2022, the Federal Court imposed combined pecuniary penalties of $228,000 on two directors of Rent2Own Cars Australia Pty Ltd (R2O) for their involvement in misleading consumers ($138,000 and $90,000 each). Between 1 March 2017 and 18 June 2018, the Federal Court found that (amongst other things), R2O misled consumers about the true cost of credit they were receiving (177 credit contracts), and charged customers annual costs greater than the 48% prescribed by the National Credit Code (140 credit contracts).
The Federal Court also found that R2O engaged in misleading or deceptive conduct and made false and misleading representations regarding financial services, in contravention of ss 12DA(1), 12DB(1)(a) and (g) of the ASIC Act, as well as that the two directors were knowingly concerned in R2O’s various contraventions of the National Credit Code. The Federal Court also noted that a penalty of $775,000 would have also been imposed on R2O, had it not been placed into liquidation and thereafter deregistered.
ASIC v Rio Tinto Limited
Penalty amount: $750,000 plus costs
Calculation: Agreement between parties
On 7 March 2022, the Federal Court ordered that Rio Tinto Limited (Rio Tinto) pay a pecuniary penalty of $750,000 together with ASIC’s costs of its proceedings against it for breaches of its disclosure obligations and laws.
On 21 December 2012, Rio Tinto became aware of the ‘Orebody Information’, which in summary, was information that Rio Tinto’s mine in Mozambique would produce a reduction in expected volumes and quality of minerals, such that the mine was no longer economically viable and that this information would have impacted Rio Tinto’s share price on the ASX. The Federal Court found that between 21 December 2012 and 17 January 2013, Rio Tinto was required, pursuant to rule 3.1 of the ASX Listing Rules and s 674(2) of the Corporations Act to notify the ASX of the Orebody Information but did not do so in the relevant period.
Following the ruling, ASIC stated that Rio Tinto had obligations to the market to keep it adequately informed about the company’s overseas mining projects. ASIC said Rio Tinto should have informed the market in a timely manner after it became aware that its Mozambique mine was no longer economically viable.
ASIC v Aware Financial Services Australia
Penalty amount: $20,000,000 plus costs
Calculation: Agreement between parties
On 17 February 2022, Aware Financial Services Australia Limited (AFSAL) was ordered by the Federal Court to pay a pecuniary penalty of $20 million for charging fees for service it did not provide, along with ASIC’s costs. The Federal Court found that between 21 August 2014 and 30 June 2018, AFSAL provided approximately 17,500 customers written disclosure documents to the effect they would receive an ‘Annual Review Services’ (a financial service). A further 7,800 customers entered into agreements with AFSAL for the provision of Annual Review Services. Although AFSAL charged customers in excess of $50 million, no services were provided.
AFSAL remediated approximately $104.8 million to affected customers. Notwithstanding, the Federal Court declared AFSAL’s conduct contravened s 12DI(3) of the ASIC Act (accepting payment without intending or being able to supply as ordered), and sections 912A(1)(a)-(c) of the Corporations Act, being that it did not provide financial services efficiently, honestly and fairly, comply with its AFSL conditions, nor comply with financial service laws.
ASIC v Westpac
Penalty amount: $113,000,000 (combined) plus costs
Calculation: Agreement between parties
On 22 April 2022, the Federal Court ordered Westpac and its affiliated businesses to pay a combined penalty of $113 million for widespread compliance failures across its banking, insurance and superannuation businesses. Collectively, Westpac also agreed to remediate in excess of $80 million to affected customers.
The Federal Court’s declarations and orders in all proceedings contained numerous contraventions, including breaches under ss 12CB(1), 12DI(3), 12DA(1), 12DB(1), and 12DM(1) of the ASIC Act, and ss 5A, 912A(1), 912A(5A), 962p and 963K of the Corporations Act. The penalties, which were spread across six separate proceedings, are summarised as follows:
(a) $40 million – Westpac charged fees to approximately 11,800 deceased customers, which were never provided due to their deaths. The fees charged totalled in excess of $10.9 million.
(b) $15 million – Westpac issued duplicate insurance policies to over 7,000 customers causing customers to pay for multiple policies, and also issued policies to some customers who did not consent.
(c) $6 million – Westpac and its entities charged contribution fees for financial advice without disclosing those fees. Over 25,000 accounts were charged approximately $10.6 million over the span of 8 years.
(d) $20 million – Westpac allowed approximately 21,000 deregistered company accounts to remain open and continued to charge fees on those accounts. The Federal Court found that Westpac benefited from allowing these accounts to remain open.
(e) $12 million – Westpac sold flexi-loan debt and credit cards to debt purchasers with incorrect interest rates. This resulted in over 16,000 customers being overcharged with interest, notwithstanding experiencing financial distress.
(f) $20 million – Westpac’s subsidiary, BT Funds Management, charged almost 10,000 members commission payments which were included within its insurance premiums, despite those commissions being banned.
What should Australian companies be mindful of?
The commencement of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) in March 2019 has enabled ASIC to pursue stricter penalties under company laws. Under the new regime, the maximum civil penalties are:
(i) individuals: 5,000 penalty units (currently $1.11 million), or three times the benefit obtained and detriment avoided.
(ii) Companies: the greater of: (i) 50,000 penalty units (currently $11.1 million) (ii) three times the benefit obtained and detriment avoided; or (iii) 10% of annual turnover capped at 2.5 million penalty units (currently $555 million).
Australian companies should be vigilant that ASIC’s recent enforcement and regulatory update, as well as its priorities for the next five years, suggest that the corporate regulator will continue to address misconduct, including through enforcement actions. If these actions are successful, the court will likely impose a range of penalties depending on various factors. These factors are set out within s 12GBB(5) of the ASIC Act, and include the nature and extent of contraventions, loss and damage suffered, and previous convictions of the contravener.
Other factors from the common law include the size, financial position, and cooperativeness of the contravening company. The examples above illustrate penalties for relatively minor contraventions (e.g. Squirrel – $55,000) through to extremely serious breaches and penalties (e.g. Westpac – $113 million). Most example decisions above include circumstances in which the regulator and company had come to an agreement as to the appropriate pecuniary penalty.
However, the Court must be persuaded that the penalty proposed by the parties is appropriate and the agreement of the parties cannot bind the Court in any circumstances to impose a penalty which the Court does not consider to be appropriate.
Companies should also be mindful that the regulator is empowered to impose penalties on both companies and individuals alike, including directors and officers of companies (e.g. as in the R2O decision described above).
For further information, please contact:
Jonathon Ellis, Partner, Bird & Bird
jonathon.ellis@twobirds.com
