05 Feb 2015

The six phases of an ASIC investigation - and how you can be prepared

by Randal Dennings

If you understand how an ASIC investigation is likely to proceed, you can be better prepared and can ensure any investigation will run as smoothly, and with as little disruption to your business, as possible.

In the environment of investigations by a regulator, such as ASIC, while it may seem like a regulatory whirlwind to the uninitiated, it is generally possible to identify a few key phases over the course of the matter. If you understand how an ASIC investigation is likely to proceed, you can be better prepared and can ensure any investigation will run as smoothly, and with as little disruption to your business, as possible.

Phase 1: pre-investigation and preventive action

Proactive Governance, Risk and Compliance (GRC) practices and rigorous monitoring and supervision of those practices may assist in limiting the scope of regulator investigations or avoid investigations altogether.

What you should do now

  • Review your existing GRC advice framework to identify gaps and to help develop more effective GRC advice frameworks.
  • As part of your preparation for regulator surveillance/investigations, undertake file reviews through the prism of a regulator's perspective to identify areas for improvement or challenge.
  • Prior to undertaking significant changes to offerings in products and or organisational distribution lines, seek advice on legal requirements and interpretation, and provide feedback on peer and regulator risk appetite in these areas
  • Conduct mock surveillances/investigations.
  • Undertake a legal risk assessment.
  • Review the adequacy of controls.
  • Review insurance policies to determine, or take advice on, whether they will respond effectively to regulatory investigations and their consequences, and assist with negotiation of changes to wordings.

Phase 2: ASIC identifies its concerns

Enforcement action undertaken by ASIC may be triggered by a complaint from a customer/client, routine ASIC surveillance, referral from another regulator or a report to ASIC (such as a breach report under section 912D).

A critical step during this phase may be the voluntary remediation steps undertaken by a licensee and/or loss mitigation steps in response to ASIC's concerns (to the extent these concerns are known). In our experience, these initial steps can be critical in future negotiations with ASIC during an enforcement stage.

What you should do now

  • Understand the scope of the ASIC notices and the appropriate response.
  • Ensure any documents to be submitted to ASIC are reviewed to confirm they are within scope and to identify any possible issues.
  • Ensure claims of privilege are made over any relevant documentation.
  • Understand your obligations under your insurance policy and the need to notify insurers of an ASIC investigation, the form of insurance notification and the appropriate time to lodge notification. The need to notify under your insurance policy should be monitored closely and legal advice sought where you are uncertain.
  • Instruct lawyers to undertake a preliminary review of your advice processes, procedures and guidelines and to advise on the immediate remediation steps which can be taken while ASIC investigations are progressing. This will help in negotiations with the regulator and ensure you meet your general obligations to act honestly, efficiently and fairly.
  • Consider any possible immediate remediation steps including improvements to GRC advice frameworks, client remediation and disciplinary action.

Phase 3: ASIC initiates formal investigation

ASIC makes a determination that the concern warrants a formal investigation. During this phase, ASIC may also call for meetings with the licensee, issue notices for information (or further notices where the investigation is triggered by surveillance), may seek formal responses on certain issues raised by ASIC relating to its concerns, may seek responses in the form of detailed reports and/or may seek to hold formal examinations with key persons of interest. This stage is critical and how this is managed will invariably set the tone for your future engagement with ASIC.

What you should do now

  • Instruct lawyers to review the issues which are the subject of investigation (as with any other legal advice, your communications with and advice from the lawyers will be subject to legal professional privilege).
  • Understand the scope of any further notices and develop an appropriate response.
  • Ensure that any documents to be submitted to ASIC are reviewed to confirm they are within scope, any possible red flag issues are identified, and to assert any available claims for privilege.
  • Understand your obligations under your insurance policy to notify insurers of an ASIC investigation, including the form of notice and timing of notification.
  • Attend formal examinations and prepare for formal investigations.

Phase 4: independent review of client files

As part of its investigations or requirements on licensees to address ASIC's concerns, ASIC may request the licensee to arrange for an independent review of its client files. This may be agreed to voluntarily, through an administrative arrangement, or pursuant to an enforceable undertaking. While such a review would generally form part of the investigation or enforcement phase, there are some specific matters that need to be taken into account when the ASIC investigation involves reviewing client files.

What you should do now

  • Instruct your lawyers to coordinate the review so that where possible, advice sought and provided in relation to it is protected by legal professional privilege.
  • Engage an appropriate independent expert.
  • Develop terms of reference for the review.
  • Develop or advise on the appropriate template or framework for the client review.
  • Seek legal advice on whether any issues identified are likely to be a breach of relevant legal obligations such as the "best interests duty" or other legal obligations.
  • Make any notifications to insurers of any potential individual claims arising out of an independent client review, and submit insurance claims under relevant policies.

Phase 5: enforcement/negotiating an administrative outcome

ASIC has a number of powers which it may exercise, including enforcement remedies (such as penalties, banning orders and prosecution), protective action (such as revocation or suspension of licence, bans, public warnings), preservative action (such as an injunction), corrective action (such as further corrective disclosure to consumers), compensation, negotiated resolutions (such as administrative arrangements or enforceable undertakings) and infringement notices.

ASIC may, for example, seek that the licensee agree to an administrative or regulatory outcome to remedy the misconduct or breach.

In determining the appropriate remedy, a key consideration for ASIC will be the extent of harm or loss to investors or consumers.

What you should do now

  • Respond to enforcement action and understand the terms of any administrative or regulatory outcomes (such as an enforceable undertaking).
  • Seek legal advice on the proposed enforcement action including the terms of any administrative or regulatory outcomes (such as an enforceable undertaking).
  • Review any proposed ASIC media releases on the administrative or regulatory outcome.
  • Prepare client communications.
  • Lodge your insurance claim.

Phase 6: post-investigation

A licensee's actions following an ASIC investigation can be just as critical as its actions during the investigation phase in ensuring ongoing compliance with legal obligations, and limiting future regulatory action.

What you should do now

  • Review the status and progress of implementation of any improvements to your GRC advice framework.
  • Implement any remediation steps agreed with ASIC, such as enforceable undertaking actions, and/or undertake any proposed or agreed independent compliance or advice reviews.
  • Ensure any further reporting to ASIC is conducted promptly and efficiently.

How we have helped other clients

Clients have reported that our involvement is not only cost-effective but helps them make the most of their expenditure in deriving value for their further governance risk and compliance efforts going forward.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.