ASIC asks ‘Why not litigate?’ There are reasons it shouldn’t

The financial services royal commissioner, Kenneth Hayne, made that point last year when he said ASIC administered 11 pieces of legislation and their associated regulations. The introductory overview of the consumer credit legislation alone was 86 pages of explanation and the overview for sales and advice of financial products was 114 pages, he said.


Shipton devoted a significant part of his address to The Australian Financial Review’s banking and wealth summit last week to talking about “fairness” in the context of financial services firms’ legal obligation to provide services “efficiently, honestly and fairly”.

Whether something is inefficient, dishonest or unfair is, of course, in the eye of the beholder, or the courts if the regulator and those it regulates disagree. These aren’t objective concepts and there haven’t been a lot of court judgements to help clarify them.

The way Shipton framed the question that underpins ASIC’s new approach to enforcement was revealing.

Commissioner Hayne, in quizzing ASIC executives who appeared before the royal commission, asked one why ASIC worked with companies rather than just saying “Do it”.

“We have to balance the different options. If a lender is prepared to make changes in response to the concerns we have raised that can often be a faster and more effective way of getting that change in place, as distinct from going down the path of taking court actions,” the executive said.

It was the fierce criticism by the royal commission of ASIC’s former approach to enforcement – and the use of enforceable undertakings rather than litigation in particular – that caused Shipton to adopt the new approach.

ASIC had previously viewed litigation as almost the option of last resort.

With most of the misconduct that led to the establishment of the royal commission self-reported by the institutions and much of it occurring at quite low levels within the organisations, ASIC saw enforceable undertakings and associated “donations” to its financial literacy fund as a way to gain the co-operation of the companies to improve, not only their own conduct and systems, but those of the sector generally.


Its approach, based on a pragmatic recognition that, in vast and complex organisations like the major banks, errors and mistakes would occur, made it more likely that institutions would self-report breaches, co-operate in remedying them and their consequences, and provide learnings that ASIC could broadcast and deploy elsewhere.

A “litigation first” policy would ensure the institutions would limit the extent of their co-operation to try to limit their liability and would respond legalistically.

With the new sanctions – penalties of $1.05 million for individuals, or three times the benefit gained, or as much as $525 million for companies – the potential liabilities have exploded and therefore the institutions are likely to be even more defensive and legalistic than in the past.

The best use of litigation against large companies, in the absence of clear-cut and indefensible breaches of the law, is as a negotiating tool.


In the past, enforceable undertakings were worked out between the institutions and ASIC and the institutions were the better negotiators. They appeared to get off very lightly (although the actual remediation for their breaches now looks like running into the billions).

In future, with the threat of punitive fines or worse hanging over them if ASIC were to litigate successfully, the regulator ought to be able to impose tougher conditions and extract far larger financial penalties.

Former Australian Competition and Consumer Commission chairman Graeme Samuel has argued that ASIC shouldn’t negotiate. It should propose non-negotiable terms for an undertaking and then, if the matter is of significant consequence and principle, take it to the courts if the institution won’t accept them.

That’s a sensible approach and one that would be made easier and more attractive for both ASIC and the companies it regulates if the laws they were being asked to comply with were simpler and clearer.

A ‘litigation first’ policy would ensure the institutions would limit the extent of their co-operation to try to limit their liability.

It was disappointing that the royal commission, after questioning the complexity of financial services regulation in its interim report and querying whether it couldn’t be simplified, recommended only minor tinkering in its final report.

We’d get better regulation, better compliance and ASIC’s litigation challenges would be significantly reduced if the tide of legislation institutions have been inundated with it recent years – the continuing spate of financial services-related legislation has almost overwhelmed the ability of the institutions’ systems to keep up – was radically pared back and made simpler.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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