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Key themes shaping Australian regulatory enforcement risk in 2024
Key themes shaping Australian regulatory enforcement risk in 2024

Accountability, governance, risk and compliance

Key regulatory and enforcement developments in 2023

In relation to accountability, in September 2023 the FAR finally passed and is due to commence in 2024. ASIC has continued to pursue individuals for egregious breaches of directors' and officers' duties under the Corporations Act, including in relation to failures in the management of non-financial risk. This is consistent with ASIC's announcement in November 2023 that it had added governance and directors' duties failures to its list of enduring enforcement priorities.

In relation to governance, risk and compliance, liability for inadequate systems and processes has been a nascent emerging issue for a number of years:

  • Sanctions laws, and a proposed extension of foreign bribery laws, deem corporates to be liable for offences committed by employees unless the company can prove it had in place adequate systems to prevent the offending conduct.
  • The federal Criminal Code allows fault elements of criminal offences to be attributed to companies that fail to create and maintain a corporate culture that requires compliance.
  • AUSTRAC has had a longstanding and successful enforcement record for failures to have in place systems meeting the expectations of anti-money-laundering legislation.
  • There is a long record of cases that have placed emphasis on corporate systems and processes as an aggravating (or mitigating) factor in determining penalty.

More recently, ASIC's investigations and enforcement actions have had a persistent focus on the adequacy of systems and processes. This has included actions under the 'efficiently, honestly and fairly' obligation under section 912A of the Corporations Act, and also actions alleging false and misleading implied representations that adequate systems and processes were in place to ensure relevant customer and regulatory outcomes.

Relevantly:

  • The courts have emphasised the need for AFSL holders to have adequate systems in place (this included in a proceeding in mid-2022 where RI Advice admitted to having contravened ss912A due to failing to have adequate risk management systems and failing to implement adequate cybersecurity measures).1
  • In two separate decisions in November 2022, the court dismissed allegations made by ASIC against two banks, and held that s912A(1)(a) does not impose an obligation on AFSL holders to establish and maintain systems and processes in which an error will never occur, and does not set a standard of commercial perfection.2 3 These cases left open that differently framed cases establishing that systems were inadequate to prevent systemic issues could succeed.
  • In the 2023 decision of ASIC v Diversa, the court reiterated that s912(1)(a) is a forward-looking obligation and is not a standard of perfection.4 The court held that Diversa did not fail to act efficiently, honestly and fairly or fail to take reasonable steps to ensure its representatives complied with financial services laws. Notwithstanding, the court made clear that an AFSL holder cannot 'wash their hands' of responsibility by contracting their services, and that in some circumstances s912A(1)(a) may require a holder to have systems in place to be alerted of issues of concern in relation to contracted services.5

What are the likely regulatory and enforcement developments in Australia in 2024?

We expect ASIC's focus on the adequacy of systems and processes to be an ongoing and increasing focus for regulatory enforcement, and that the initial misses will nevertheless provide a roadmap for future development.

We also expect that the focus on systems and processes will continue to be a central factor in assessing corporate culpability. An illustration of this sentiment is reflected in a decision released in early 2024:

The question to be asked at all times is…what and where are the inevitable defects in such complex systems, and what is being done to find them and eliminate them… It is almost counsel of perfection, because that is what is required. Prevention is everything, and the sanctioning response must reflect this in order to ensure this is what takes place.6

In addition, we expect the focus on senior-level accountability to be at the forefront of the regulatory agenda in 2024. In particular, we expect to see the following developments:

  • The FAR will be jointly administered and enforced by ASIC and APRA, and is due to commence for the banking sector in March 2024, and the superannuation and insurance sectors in March 2025. We expect that banks, trustees and insurers will be busy in the coming months preparing for the commencement of the regime. While we expect that transition for banks will be less onerous given the FAR is largely based on the existing Banking Executive Accountability Regime, the two regimes are not equivalent. In particular, FAR introduces the concept of 'significant related entities' (SRE) in respect of which each accountable entity will have obligations. The rationale for the introduction of this concept is that the poor behaviour of those entities (the SRE) has the potential to adversely affect the prudential standing or reputation of the regulated entity itself.
  • Consistently with its November 2023 announcement , we expect governance and director duties to be a focus area for ASIC.
  • In December 2023, AUSTRAC indicated that a focus of its enforcement work will be the joinder of individuals in proceedings against reporting entities where that individual is concerned in, or party to, a contravention of a civil penalty provision of the AML/CTF Act. Board and senior management oversight and accountability has long been an area of focus for AUSTRAC, though this is the first time AUSTRAC has expressed an intention to focus on commencing proceedings against individuals. It remains to be seen how this new strategy will interact with ASIC's existing focus on enforcement of directors' and officers' duties in the context of AML/CTF failures, and what impact it will have on AUSTRAC's approach to investigating non-compliance. This development underscores the importance of ensuring governance and oversight in relation to AML/CTF is appropriate and operating effectively.

Who are the key regulators and enforcement agencies in relation to this area?

ASIC, APRA and AUSTRAC.

What are the key sectors of focus?

Given the sweeping statements by ASIC, APRA, and AUSTRAC, we expect key sectors will include traditional financial services (banking, superannuation, insurance), in addition to digital currency exchanges, payment platforms, bullion, and non-bank lenders and financiers.

Footnotes

  1. Australian Securities and Investments Commission v RI Advice Group Pty Ltd [2022] FCA 496 at [65]-[66] (Rofe J).

  2. Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1422 at [151]-[152], [161] (Downes J).

  3. Australian Securities and Investments Commission v National Australia Bank Limited [2022] FCA 1324 at [364]; Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1422 at [151]-[152], [161].

  4. Australian Securities and Investments Commission v Diversa Trustees Limited [2023] FCA 1267 at [152]-[153] (Button J).

  5. Australian Securities and Investments Commission v Diversa Trustees Limited [2023] FCA 1267 at [253] to [255].

  6. Australian Securities and Investments Commission v Members Equity Pty Ltd (formerly Members Equity Bank Ltd) [2024] FCA 15

  7. https://www.dcceew.gov.au/environment/epbc/epbc-act-reform#:~:text=The%20government%20has%20committed%20to,under%20the%20new%20EPBC%20Act.

  8. DCCEEW, https://www.dcceew.gov.au/climate-change/emissions-reporting/national-greenhouse-energy-reporting-scheme/safeguard-mechanism#:~:text=The%20Government%20is%20reforming%20the,reform%20the%20Safeguard%20Mechanism%3B%20and.

  9. TNFD, https://tnfd.global/news/tnfd-releases-third-beta-framework/.

  10. Gina Cass-Gottlieb, 'Law Council Competition and Consumer Law Workshop opening address' (9 September 2022) <https://www.accc.gov.au/speech/law-council-competition-and-consumer-law-workshop-opening-address>