ASIC has released its enforcement report for the period 1 January 2017 to 30 June 2017, which outlines ASIC’s enforcement results during the period. The report also provides an overview of some of ASIC’s enforcement priorities, the top three of which are:
(1) Gatekeeper culture and the ‘big end’ of town
ASIC continues to focus on the ‘gatekeepers’ of financial services, which include company directors and officers, auditors, insolvency practitioners and business advisors, as well as maintaining high standards of corporate governance by public companies.
Enforceable undertakings have been in vogue when dealing with poor gatekeeper culture and conduct by the big four banks. ASIC, for example, has utilised this enforcement tool recently to address inadequate systems and controls to prevent, detect and respond to inappropriate conduct in relation to a bank’s wholesale foreign exchange business.
With the number of investigations nearly halving, and ASIC’s enforcement compensation/remediation increasing from $13.4 million to a staggering $618.8 million from this period last year, it would appear that ASIC are focusing on the big end of town. This is supported by a substantial decrease in criminal charges laid and infringement notices issued.
(2) Cyber threats and technology-enabled offending
Given the spate of cyber attacks over the last 6 months, it comes as no surprise that cyber threats and technology-enabled offending are both front of mind for ASIC. ASIC has highlighted that the average cost of cyber crime to Australian companies is now estimated to be over $5.6 million per incident.
It appears that ASIC will pay particular attention to cyber threats in the context of rapid technological developments, such as digital disruptors operating in financial markets. This would include emerging data storage and fintech service providers, market participants who are vulnerable to unauthorised trading or market manipulation, and banking and payment systems that utilise electronic payment methods.
(3) Credit shift
Given the bullish property market, and the fact that household debt is soaring, it’s unsurprising that ASIC is focusing on responsible lending practices in the consumer credit industry. This focus will include assessing the information submitted by mortgage brokers to lenders (for example, fraudulent loans), and lender requirements to assess and verify a borrower’s financial circumstances.
This priority appears to follow APRA’s tightening of lending standards for residential mortgages in March 2017 in response to interest-only borrowings increasing to nearly 40% of all new loans.
A crackdown on consumer credit at the big end of town was confirmed by ASIC’s announcement in April 2017 that eight lenders will be forced to provide remediation, including possible refunds, to consumers who suffered financial difficulty as a result of breaches in past lending practices. In May 2017, ASIC announced that Motor Finance Wizard had signed an enforceable undertaking to pay consumers over $11 million in remediation over responsible lending concerns.
Implications for Underwriters and policyholders
Underwriters and policyholders ought to be aware of these enforcement trends. The key risk areas ASIC is seeking to address may have potential implications for the availability and coverage for fraud, insolvency, run-off or other misconduct under a PI or D&O policy.
Generally speaking, enforceable undertakings appear to be a cost effective measure utilised by ASIC to address certain financial services breaches, rather than pursuing lengthy, costly litigation against offending companies.
However, it is noteworthy that wherever possible, ASIC will seek to recover investigation expenses and costs from persons who have caused those expenses and costs to be incurred (following the release of Information Sheet 204 Recovery of investigation expenses and costs in July 2015 and pursuant to their statutory powers). Notably, such expenses and costs are broad and may include salary costs of ASIC staff, external legal costs and the costs of engaging experts.
Given the complexity and protracted nature of these types of matters, ASIC’s investigation expenses and costs may be significant.
In a technologically advanced environment in which credit and financial service providers operate, businesses should regularly review their insurance policies and consider the scope of their cover and existing policy limits, in order to ensure they remain suitable.