The Federal Government has implemented the latest round of legislative changes to strengthen ASIC's powers: the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Act 2020 (Stronger Regulators Act).
The Stronger Regulators Act, which commenced on 18 February 2020, implements those recommendations from the ASIC Enforcement Review Taskforce Report from December 2017 that the Government committed to adopting in April 2018. The remainder of the Taskforce recommendations, which were put on hold pending the Financial Services Royal Commission, are currently the subject of draft exposure bills and consultations.
The Stronger Regulators Act aims to:
- harmonise and enhance ASIC's search warrant powers;
- improve ASIC's ability to access telecommunications intercept materials;
- extend ASIC's banning powers; and
- strengthen ASIC's licensing powers.
The changes commenced on 18 February 2020. For the purposes of search warrants, access to intercept materials and banning orders, the relevant conduct may have occurred prior to 18 February 2020. ASIC has stated in its update on 26 February 2020 that it is incorporating these powers into its supervision and enforcement processes.
We explain the key changes in ASIC's powers below and what ASIC's strengthened powers may mean in the current regulatory environment.
Harmonising and enhancing ASIC's search warrant powers
ASIC has had a range of search warrant powers to seize "books"[1] under the Australian Securities and Investments Commission Act 2001 (ASIC Act), the National Consumer Credit Protection Act 2009 (Credit Act), the Retirement Savings Accounts Act 1997 (RSA Act), and the Superannuation Industry (Supervision) Act 1993 (SIS Act). ASIC can apply for a search warrant where the contravention would be an indictable offence under one of these Acts. ASIC has also had a broader search warrant power to seize "evidential material" under the Crimes Act 1914.
According to the ASIC Enforcement Review Taskforce Report, between January 2011 and December 2017, ASIC obtained just over 200 warrants to search premises, with all but two of those search warrants obtained under the Crimes Act.
The key changes under the Stronger Regulators Act (which changes apply to search warrants applied for on or after 18 February 2020) are:
ASIC's existing search warrant powers harmonised by reference to the Crimes Act: ASIC's search powers under the financial services legislation have been amended to effectively operate under the Crimes Act. ASIC now has the ability to search and seize evidential material, not just books, if the contravention would be an indictable offence under the legislation for which it is responsible.
ASIC's use of "evidential material" no longer restricted to prosecuting criminal offences: Previously ASIC was limited to using material seized under the Crimes Act for investigating and prosecuting criminal offences, and using material seized under the ASIC Act, although rarely utilised, for a proceeding under a Commonwealth or State law. ASIC's use of "evidential material" now seized under the Crimes Act (and also the ASIC Act, Credit Act, RSA Act and SIS Act) has been considerably broadened to allow "ASIC or an ASIC staff member to use such material for the purpose of the performance of ASIC's functions or duties or the exercise of its powers". This may mean that material seized under a search warrant (regardless of the Act) may be used for, among other things, preventing or investigating a breach of an offence provision or civil penalty provision or a breach that could result in civil or administrative action.
ASIC is no longer required to forewarn a person under investigation that it may apply for a search warrant: ASIC can obtain a search warrant under the Credit Act, the RSA Act and the SIS Act without first demonstrating to the court that a notice to produce books has not been complied with.
ASIC will be able to search and seize a wider range of material relevant to its investigations: ASIC is no longer required to specify the particular books thought to exist in the search warrant. The search warrant will now be stated to be linked with the offence to which it relates (instead of specific books) and the kinds of evidential material that can be searched for and seized under the warrant.
"Ancillary powers" for search warrants under the Crimes Act: ASIC's search warrant powers provide it with the ability to:
- take photos and make video recordings of the search;
- operate electronic equipment on the premises to access data;
- move devices to another place for processing to determine if the devices contain evidential material;
- operate seized devices to access data; and
- apply to a magistrate for an order requiring a person to provide reasonable assistance or information to assist with a computer or other electronic device.
Private litigants' access to seized material: A private litigant can only obtain the seized material through an order of a court (such as a subpoena) or of a tribunal that can hear, receive, or examine evidence.
ASIC's improved access to telecommunications intercept material
ASIC's access to date to lawfully intercepted information has been limited to only information that is related to the intercepting agency's own investigation.
The key changes under the Stronger Regulators Act are:
Broader access to intercepted material relating to ASIC's investigations: interception agencies are now permitted to provide ASIC with lawfully intercepted information or intercepted warrant information, if the information relates or appears to relate to a matter that ASIC can investigate involving a serious offence or the likely commission of a serious offence. Serious offences include, for example, offences relating to insider trading, market manipulation and financial services fraud. ASIC itself is not permitted to intercept information; rather, it allows ASIC to receive and use information already intercepted by other agencies.
Recording intercepted material for permitted purpose: members of ASIC are able to use and record the intercepted information received from an agency for a permitted purpose, that is, the investigation of a serious offence or subsequent reporting or prosecutions with respect to the investigation.
Extending ASIC's banning powers
The key changes are:
Expanding the grounds on which ASIC can make a banning order: The grounds on which ASIC may make a banning order have been expanded, beyond the existing grounds of "not a fit and proper person" and "not adequately trained or competent to provide financial services", to include circumstances where:
- ASIC has reason to believe that the person is not adequately trained or competent to:
- perform one or more functions as an officer of an entity that carries on a financial services business; or
- control an entity that carries on a financial services business; and
- the person becomes a Chapter 5 body corporate, or an insolvent under administration (for financial services) or the person becomes insolvent (for credit activities);
- the person has at least twice within the last seven years been an officer of a corporation unable to pay its debts. Specifically, the corporation must have been carrying on a financial services business or engaging in credit activities, that was wound up while the person was an officer of the corporation or within 12 months after the person ceased to be an officer, and a liquidator must have lodged a report about the corporation's inability to pay its debts; or
- the person has at least twice been linked to a refusal or failure to give effect to an AFCA determination relating to a complaint with respect to a financial services business or credit activities.
Scope of banning order expanded: in addition to banning a person from providing a financial service or engaging in credit activities, ASIC's banning powers have been expanded to prohibit a person from doing any of the following:
- providing any financial services, or engaging in any credit activities;
- controlling an entity that carries on a financial service business, or controlling another person that engages in credit activities; and
- performing any function involved in carrying on a financial services business or credit activities.
These changes to banning orders and disqualification orders apply from 18 February 2020 (the conduct that is the subject of the banning order may have occurred before 18 February 2020).
Strengthening ASIC's licensing regime
These changes apply to existing AFS licensees and credit licensees effective from 18 February 2020. ASIC is working with applicants to obtain any necessary further information where AFS licence or credit licence applications were submitted, but licences not granted, before 18 February 2020.
The key changes are:
Replacing the "good fame or character" test with the "fit and proper person" test: To grant an Australian financial services (AFS) licence , ASIC must be satisfied that the person is a "fit and proper person" to provide the financial service covered by the licence. This amendment aligns the test for credit licensees and AFS licensees. The Stronger Regulators Act also extends the test to apply to "controllers" of a licensee. A "controller" of a body corporate or an entity other than a body corporate for the purposes of both the AFS and credit licensing regimes may include a person:[2]
- having the capacity to cast, or control the casting of more than one half of the maximum number of votes that might be cast at a general meeting of the body corporate;
- having the capacity to control the composition of the body corporate's board or entity's governing body; or
- having the capacity to determine the outcome of decisions about the body corporate or entity's financial and operating policies.
Amendments to the application process: Applicants have an express obligation to confirm that there have been no material changes prior to ASIC granting the licence and ASIC may refuse an application if it contains misleading or deceptive information.
Additional powers to suspend or cancel a licence where service not provided: ASIC may now suspend or cancel the AFS licence or credit licence if financial services or credit services are not provided within six months of granting the licence.
What will these strengthened powers mean in practice?
Evidence for enforcement action: The strengthened powers provide ASIC with further avenues to collect evidence for the purposes of ASIC's investigations and enforcement action. In particular, the changes to the search warrant powers may result in an increase in the use of evidential material seized being used in enforcement action, particularly in civil and administrative proceedings where ASIC was not previously able to use material seized under the Crimes Act.
Use of banning orders: The number of banning orders made by ASIC to remove or restrict individuals from providing financial services or credit has been steadily increasing following the Financial Services Royal Commission. Between January and June 2019, 103 individuals were removed or restricted from providing financial services. The additional grounds available for making a banning order may increase the use of this enforcement outcome by ASIC.
[1] Under the ASIC Act, "books" is defined as including: a register, financial reports or financial records, a document, banker's books, and any other record of information.Back to article
[2] Section 910B of the Corporations Act 2001Back to article
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