Aussie regulator signals tougher misconduct stance

A repeat of the kind of conduct risk failures that saw Australia’s largest banks and insurers bribing staff to hit sales quotas and selling life insurance to dead customers will be met with the full force of newly beefed-up laws, a senior regulator at the Australian Securities and Investments Commission has warned.

Cathie Armour, a commissioner at Asic, said her watchdog intended to take full advantage of recent changes to the law when it comes to conduct risk enforcement, which have seen jail terms ramped up for criminal offences such as market rigging and rogue trading, and a dramatic rise in fines for individuals and companies.

February’s Royal Commission enquiry into conduct failings in the Australian financial sector led to close scrutiny of the performance of Asic as a financial markets supervisor. But in the years when the scandals occurred, “some of the key provisions in our laws actually didn’t have a penalty” sufficient to deter wrongdoing, said Armour, which she attributed to past lobbying by the financial sector.

“We, Asic, are reinventing or redoubling our efforts around enforcement, and we’ve reviewed how we do that. It’s important for the effectiveness of our financial system that the community sees that the problem is effectively, efficiently and often very publicly dealt with,” said Armour, speaking at Asia Risk Congress in Singapore on September 10.

Recent amendments to Australia’s treasury laws have significantly increased penalties and prison terms for corporate and financial sector misconduct. They have also added penalties for certain types of misconduct that were not previously punished – for example, there are now penalties for firms that fail to report breaches and for operating a financial services business without a licence, among other practices. The amendments took effect in March this year, a month after the Royal Commission’s report was published.

Prison terms for the most serious criminal offences, such as market rigging or unauthorised trading, have risen to 15 years from five years, while civil penalties for individuals guilty of serious misconduct can now be fined the greater of A$1.05 million (US$720,000) or three times the financial benefit gained from the misconduct. The maximum misconduct penalty for civil breaches by companies will be either A$10.5 million, three times the benefit derived by the misconduct, or 10% of the company’s turnover, capped at A$525 million per breach.

Both Asic and the prudential banking regulator – the Australian Prudential Regulation Authority – have publicly welcomed the amendments, and signalled they intend to make full use of them.

To date, the prudential regulator’s response has been to slap multi-billion dollar capital add-ons on the Big 4 banks. This is in addition to more than US$1 billion Aussie banks had already provisioned to meet the cost of expected fines and redress related to the scandals as of the second quarter of this year.

Decent penalties

Armour praised the response of the Australian government to the misconduct scandals, saying: “In Australia, we had a situation where there were all sorts of exceptions in our rules which were the product of very effective lobbying over the years. The government has very quickly changed the framework to ensure that there are decent penalties now.”

She added: “It’s really incumbent on us all to make sure that we do have a regulatory system that is fit for purpose and it does have the appropriate penalties.”

Armour’s comments chime with those of Commissioner Sean Hughes, who said in an August speech that the focus on enforcement would be on both corporate and individual accountability. Asic will pay close attention to whether people at the executive and board levels are carrying out their legal responsibilities.

“The community is looking to see accountability more and more,” added Armour.

Editing by Costas Mourselas and Tom Osborn