After passing through both houses of Parliament in February, the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 received royal assent last week, significantly increasing both civil and criminal penalties applicable to breaches of the Corporations Act 2001 (Cth).
After first being recommended by the ASIC Enforcement Taskforce in December 2017, these changes were introduced to Parliament in late 2018 and their rapid implementation is undoubtedly linked to the outcome of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. ASIC has welcomed the passing of this Act and has commented that it is now in a “stronger position to pursue harsh civil penalties and criminal sanctions against those who have breached the corporate laws of Australia”.
These new penalties will be applicable to all Australian Financial Services License (AFSL) holders including financial institutions, insurance providers, and (if Recommendation 4.8 of the Royal Commission is adopted) even insurance claims handlers and third party administrators.
Notably, these changes also make a wider range of contraventions of the Corporations Act subject to these strengthened civil penalties. In particular, section 912A(1) which provides that financial services are provided “efficiently, honestly, and fairly”, is now covered by this new civil penalty regime.
The key features of this bill include:
- That maximum prison penalties for breaches of director’s duties and false or misleading conduct will increase from 5 years to 15 years;
- Civil penalties for companies will significantly increase from $1 million to 10% of the annual turnover of a corporation (capped at $525 million). Whereas the civil penalty for individuals will increase from a cap of $200,000 to $1.05 million and can take into account profits made from the misconduct;
- Courts will now be given the power to make a ‘relinquishment order’ that can operate to deprive an individual or corporation from any financial benefits or profits gained from a breach of a civil penalty provision. This remedy can apply in addition to any pecuniary order;
- In addition to extending to section 912A(1), civil penalties will now apply to AFSL holder’s failure to report breaches and provide adequate disclosure;
- Section 1317QA of the Corporations Act has been introduced which provides that any civil penalty provisions requiring something to be done by a particular time is the subject of an ongoing obligation. This means that, each day an AFSL holder fails to comply with these obligations, a separate contravention arises with a separate penalty; and
- A new dishonesty test has been introduced for offences under the Corporations Act. “Dishonesty” will now have an objective definition and will be assessed according to the standards of ordinary people as per the single limb test in Peters v R (1998) CLR 493. This is important as, against this standard, it is now possible to engage in dishonest behaviour without a conscious awareness that the conduct was dishonest.
Implications
Considering the passing of these amendments in the context of ASIC’s newly announced “why not litigate” approach, it is clear that banks and insurers alike will need to tread carefully. Not only will these bodies need to ensure they are providing services in an efficient, honest and fair manner, but these institutions will also need to have strict mechanisms in place to ensure they promptly report all breaches to ASIC to avoid exposure to these harsher penalties.
While the full extent of ASIC’s regulatory power may not be realised until the Recommendations of the Royal Commission are implemented, it is important to note that this new civil penalty regime is currently in force and could result in tens or hundreds of millions in penalties if not strictly followed.
