ASIC announces 2023 Enforcement priorities, confirms commitment to enforcement

ASIC used its Annual Forum 2022 to announce 17 Enforcement Priorities for the year ahead 2023 – 12 specific annual priorities and five enduring priorities – the first time it has explicitly identified enforcement priorities in this way.

At the same time, Deputy Chair Sarah Court confirmed ASIC’s commitment to enforcement stating ASIC the ‘new’ commission has not ‘gone soft on enforcement’, recommitting to court based enforcement alongside use of ASIC’s entire a enforcement toolkit to enforce the law.  

Announcing the priorities, Ms Court delivered a three-fold message:

• First, ASIC remains deeply committed to enforcement;
• Second, ASIC has a broad enforcement toolkit, and is committed to using the full suite of those powers; and
• Third, ASIC has identified and is working through a suite of investigations in response to these priorities, which we will see evidence of in the next 12 months.

The Enforcement Priorities have a particular focus on consumers – preventing and responding to consumer harm, significant investor losses or risk of loss, investment scams, predatory lending conduct and what ASIC considers poorly designed or ‘high risk’ products, in particular crypto (a focus area in sharp relief given the events in cryptocurrency over the last fortnight).  Those which are industry or issue specific, also have a consumer focus, in particular, insurance and energy markets. 

ASIC is not constrained by the stated priorities and will respond with enforcement action as issues arise.  But the stated priorities provide a framework for ASIC’s focus and application of enforcement and surveillance resources, and insight into how the regulator can be expected to act in the coming year, enforcement activities it will undertake and sectors and products at regulatory and enforcement risk.

As to ASIC Enforcement more generally and what ASIC’s rhetoric signals, one thing is certain – having put so clearly on the record that it has ‘not gone soft on enforcement’, ASIC won’t be stepping back from its current enforcement activity in the year ahead but is expected to increase it.  The year ahead will see continued active litigation, in particular civil penalty actions, in response to systemic issues involving large institutions, or where significant consumer harm has arisen or is at risk.  This will occur alongside a broader range of actions.  We consider there will be particular emphasis on product intervention – stop orders and product intervention orders, often resulting from increased, active surveillance across various sectors.  Also, enforceable undertakings will make something of a comeback – but these won’t be in response to systemic issues at the big end of financial services as in the past, but more likely in response to isolated issues that are identified early and before harm arises, or entered into with much smaller market or financial services participants, again where there is an absence of consumer detriment.

Keep reading for detail of the 17 priorities and more discussion of what can be expected of ASIC enforcement in the next 12 months.

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The 12 Specific Priorities

The 12 specific priorities identified by ASIC which it intends to focus on for the next year are:

• Action in response to poor design, pricing and distribution of financial products across industries including insurance, superannuation, managed investments and credit;
• Misleading conduct in relation to sustainable finance and investing including greenwashing;
• Targeting misconduct involving high risks products and crypto;
• Combating and disrupting investment scams;
• Predatory lending practices or high cost credit targeting vulnerable consumers including conduct by fringe or unlicensed lenders;
• Misleading and deceptive conduct in relation to investment products which obscures the risk, performance or nature of the products;
• Misconduct in the superannuation sector including misleading conduct and poor governance;
• Failures by providers of general insurance to deliver on pricing promises to consumers;
• Misconduct that involves misinformation through social media about investment products; 
• Governance and director duties failures including those related to property schemes which expose investors to significant loss; and
• Manipulation in energy and commodities derivatives markets; and 
• Unfair contract terms including insurance products.

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The Five Enduring Priorities

ASIC also identified five enduring enforcement priorities which will remain a longer term, core focus:

• Misconduct damaging market integrity;
• Misconduct targeting first nations people; 
• Misconduct involving a high risk of significant consumer harm (particularly targeting vulnerable consumers);
• Systemic failures by large financial institutions; and 
• New or emerging risks within the financial system.

ASIC’s Enforcement Priorities can be accessed here.

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The move to announce Enforcement Priorities

This is the first time that ASIC has identified specific priorities in this way, identifying 12 specific areas which it will target in 2023 and which may change from year to year, and five enduring priorities that will remain longer term.

In announcing the priorities on day one of ASIC’s recent Annual Forum in Sydney, ASIC Deputy Chair Sarah Court stated:

‘This is the first time ASIC has identified particular areas of enforcement focus, which we now expect to do on an annual basis. These priorities communicate our intent to industry and our stakeholders, and give a clear indication of where we will direct our resources and expertise.’

Before now, to understand what ASIC was targeting you needed to draw together disparate sources and ‘read between the lines’ – statements of general priorities, speeches, policy documents, updates and media releases, and ASIC’s corporate plan, coupled with direct observation of the Regulator’s work and approach.

The stated priorities an additional and direct resource, and an informal benchmark against with ASIC Enforcement will inevitably be measured.  It is a new and key resource in anticipating how ASIC enforces the law, how it will respond to issues, who it will target and the creative opportunities and options available in defending targets and dealing with ASIC.

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What they indicate

While the priorities are broad, they provide an important indication of what to expect.  As noted above, by laying the priorities out, and emphasising its commitment to enforcement and that it has ‘not gone soft’, ASIC has committed to maintaining or increasing its enforcement activity, and created a marker against which it will be measured in 12 months time.  For industry participants this means there will be no easing off by ASIC in the enforcement space.

Consumer focus

A key theme of the ASIC Annual Forum 2022 was the intersection of volatility, complexity and the impact of rising interest rates and inflation on consumers, businesses and the availability of mainstream credit.  Chair Joe Longo in his keynote opening remarks noted that ‘in the current investment environment and throughout the financial services sector, consumer protection must remain in sharp focus.’  

The enforcement priorities respond, with a consumer centric focus, across a diverse range of products, sectors and issues. A number of the priorities are directly consumer related:

• Product design and distribution;
• High risk products and crypto;
• Predatory or high cost lending;
• Insurance – failures to deliver on pricing promise and unfair contract terms;
• Misinformation on social media; and
• Misconduct in governance and directors duties exposing investors to significant loss, in particular in relation to property schemes.

Others are indirectly consumer centric:

• Superannuation governance, a sector that consumers are all exposed to; and
• Integrity of energy markets, as soaring energy prices bite.

Continuing and expanding existing work around DDO and credit

DDO and credit priorities are a continuation of existing ASIC priorities in enforcement.  

Following the launch of the DDO obligations last year, ASIC has recently intervened in the managed fund sector with stop orders in relation to more than 10 products, based around deficiencies in DDO and/or ‘target market determinations’ (TMD).  These interventions have come from surveillance of the managed fund sector in advertising of performance and risk.  

This should be expected to continue, with the potential for intervention in insurance, credit and superannuation.  On a number of occasions during the Annual Forum ASIC noted forthcoming surveillance in credit, and credit related intervention and action should be expected.

Chairman Joe Longo made a particular point in this opening keynote of the financial pressure that consumers will be under with persistent inflation and interest rate rises increasing costs.  He observed that many will turn to ‘fringe’ credit providers.  It is no surprise that predatory lending and high cost credit targeting vulnerable consumers is a priority.  In reality ASIC has been active already in this space taking civil penalty action for breaches of key duties by credit licensees and specific requirements of the National Credit Code.  The Signo litigation is a case in point.  This should be expected to continue and ACL holders, representatives and credit providers in the second tier and below need to be prepared and revisit compliance.

Crypto

The focus on crypto is unsurprising.  It is clear from the intervention and issuing of stop orders in relation to three Holon crypto funds that ASIC is already targeting this space.  The comments of the Chair and other representatives of ASIC at the Annual Forum made explicit its view that crypto products are complex, opaque, have poorly understood risks (due to their opacity) and are high risk.  Those comments, coming just prior to the FTX collapse and the carnage in cryptocurrencies that followed, may seem prescient now given the reports of FTX’s undisclosed dealings in investor assets and related party transactions.

The last few years has seen ASIC take widespread enforcement action against the OTC derivatives sector operating in the retail space.  That campaign has all but concluded, with many operators/participants subject of court action, wound-up or banned/had their licences cancelled.  The ASIC ban on offering OTC derivatives and binary options to retail clients has been extended to operate until 1 October 2031.

We expect a similar focus will turn to crypto as an emergent and very high risk.  ASIC Chair Joe Longo noted research suggesting that 44% of Australians held cryptocurrency in the past year.  Given the failure of FTX, crisis of confidence in cryptocurrency markets, massive losses of the last two weeks, and the concern about lack of transparency and conduct risk in crypto dealings, ASIC can be expected to sharpen its focus on a sector which remains effectively unregulated in Australia.  In the aftermath of FTX’s collapse Treasury committed to introducing legislation to regulate crypto custodial and exchange operations next year. 

ESG and greenwashing

Also worth noting, was the stated focus on ESG investment disclosure and greenwashing.  It was noted more than once at the Annual Forum that ASIC had just commenced its firm greenwashing action.  Also noted was the significant rise of ‘sustainable finance’: 

‘ASIC is also acutely aware of the rise of sustainable finance, with $128 billion net flows into ETFs with an ESG focus and a 157% cent increase in advisers who claim to provide ESG advice since 2016. ASIC will closely monitor for misleading conduct and claims of greenwashing that cannot be sustained, and take enforcement action where necessary.’

The complexity of this emerging issue was addressed in a panel on sustainable finance.  A key point was that there will be significant investment flows based on ESG principles and disclosure, but that this is one area of disclosure which is very difficult for investors to assess because of the often multiple downstream factors which underpin the sustainability of an investment (and the potential for obfuscation of misleading conduct at many points).

Property Schemes

Finally, our interest was piqued when ASIC identified the collapse of property investment schemes and related enforcement action as a specific priority.  It was noted that throughout 2022 ASIC had seen an increase in the collapse of property investment schemes, and working with liquidators, had identified potential breaches of directors’ duties and other misconduct.  It was made clear ASIC would prioritise enforcement action in relation to the management and conduct of these schemes and look to hold individuals accountable.

Rising property scheme failure is a significant issue for investors, often wholesale, and for their advisers and accountants.  Increased action by ASIC, alongside active investigation by liquidators, can increase the potential to obtain redress against assets or individuals when loss appears imminent or has occurred.  Affected investors and their advisors should take steps to ascertain what can be done as soon as possible when a collapse occurs, and be wary at the point of investment about the veracity of disclosure and management and controls in place.

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Enforcement approach – Litigation remains a focus, within a larger toolkit

Deputy Chair Sarah Court told the forum that ‘enforcement is at the heart’ of what ASIC does, noting there had been no lessening of enforcement activity in the preceding 12 months and there was a large suite of significant investigations within the Regulator.

Importantly, Ms Court noted that most of the matters ASIC has litigated to date arose under the former penalty regime, but that most future cases would be under the new penalty regime with increased maximum penalties more than ten times those applying under the former regime.  

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It’s clear that ASIC will continue its push for higher penalties under the new regime, and potential targets should expect much higher civil penalties in relation to any conduct occurring after March 2019.

Addressing litigation directly, Ms Court made clear that ASIC remained committed to court-based enforcement, but also acknowledged ASIC could not take every case to court, and nor did every case warrant court action.  

‘We cannot take every matter to court, and clearly not every matter warrants a litigated outcome. But while we have a range of tools – stop orders, product intervention orders, infringement notices, enforceable undertakings, public warning notices – our current enforcement approach in no way departs from the important recommendations and approach set out in the Royal Commission.’

Alongside its commitment to Royal Commissioner Hayne’s recommendations, ASIC has emphasised using the full enforcement toolkit, taking a proportionate and scaled approach in which matters it pursues and how it pursues them.  

We are already experiencing this with our clients in the funds management sector,  with a number of active targeted and general ASIC surveillances on foot, part of an increasingly interventionist approach to compliance.  We expect use of stop orders and product intervention orders to increase, particularly around the DDO regime, where ASIC has already been active in funds management and a credit surveillance of DDO and TMD is underway.

Importantly though, Ms Court made clear that where misconduct is engaged in by a large financial institution and has the potential for significant consumer harm, litigation seeking a significant financial penalty will be the most likely response.

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Conclusion

In announcing enforcement priorities for 2023 and confirming its commitment to hard enforcement, ASIC has set a benchmark for itself.  What this means is there cannot be any lessening of ASIC’s enforcement activity.  As had been indicated, it can be expected to increase across a broader range of tools.  There will be a greater emphasis on surveillance and intervention re product and sectors, in particular in response to emerging issues.

In all we expect increased enforcement activity through 2023, in particular earlier intervention, with more product intervention and stop orders, alongside increased surveillance and soft enforcement action around compliance, but a backbone of civil penalty action seeking significantly increased penalties and criminal prosecution where significant harm is at risk or occurs.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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