For the first 90 years of Federation, civil penalty provisions were rarely found in the Commonwealth statute book.[1] In 1989, the Senate Standing Committee on Legal and Constitutional Affairs (the Cooney Committee) inquired into directors’ duties.[2] The Cooney Committee recommended the enactment of civil penalty provisions for breaches of directors’ duties. That recommendation was legislated in 1992.[3] Since then, there has been a significant increase in the number of civil penalty provisions in the various financial services statutes.
In 2002, civil penalty provisions relating to financial services were first inserted into the Corporations Act by the Financial Services Reform Act 2001 (Cth).[4] That Act extended the civil penalty regime to apply to offences relating to all market misconduct.[5] By 2015, there were 50 civil penalty provisions in the Corporations Act.[6] By November 2018, there were 72.[7]
If the recommendations of the ASIC Enforcement Review are implemented,[8] there will be 37 new civil penalty provisions in the Corporations Act, and 11 new civil penalty provisions across the National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act), the Credit Code and the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act).[9] ASIC is, or will be, responsible for enforcing those provisions.[10]
As civil penalty provisions have proliferated, and been more regularly litigated, a body of law has developed. Though the courts must apply civil procedure rules to civil penalty proceedings,[11] proceedings for a civil penalty have both civil and criminal characteristics.[12] Because of that, the common law privilege against self-incrimination,[13] and the privilege against exposure to a penalty,[14] extend to natural person defendants to civil penalty proceedings. The penal nature of the proceeding also means that satisfaction that an issue has been proved ought not to be reached by ‘inexact proofs, indefinite testimony, or indirect inferences’.[15]
The growth in the number of civil penalty provisions, in the law relating to the specific provisions, and in the related procedural law, coupled with ASIC’s ineffective enforcement culture, have caused me to consider whether radical change is required. I have already ruled out transferring part of ASIC’s remit to the ACCC. Another option would be to establish a specialist civil enforcement agency, just as the Commonwealth and all of the states and territories have specialist agencies to prosecute criminal breaches.
The creation of a specialist civil enforcement agency would preserve all of ASIC’s regulatory tools, save for the right to litigate in respect of civil penalty provisions. ASIC would be required to prepare a brief of materials to the new agency if a particular evidentiary threshold was reached. It would then be for the enforcement agency to make any decision about whether to commence proceedings. In other words, ASIC would act as the investigators, but not make the decision to commence civil penalty proceedings.
There would be some benefits in such an arrangement. A specialised litigation agency would have to develop core skills in what is an increasingly specialised area of the law. This arrangement would repose responsibility for determining whether public interest considerations required action or no action in a professional body that would become skilled in making those judgments.
At the same time, the twin peaks model would be preserved. ASIC would retain its licensing authority and the power to take action under a licence. It would remain the entity in regular contact with the regulated population. And the risk of industry capture affecting litigation decisions would be removed, by placing that decision in an independent agency.
Notwithstanding the prospect of those benefits, I do not recommend such a radical change. It may be that the removal of a regulatory tool as important as civil penalty litigation would have other effects for ASIC’s work.[16] Those effects would need to be properly understood before taking such a large step. But, more importantly, ASIC has acknowledged that its enforcement culture must change.[17] It should be given time to demonstrate that changes can be made and to demonstrate that, once made, the changes are durable.
Although I do not now recommend the establishment of a specialist civil enforcement agency, ASIC’s progress in reforming its enforcement function should be closely monitored. If, over the coming years, it becomes apparent that ASIC is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability, further consideration should be given to developing a specialist agency of the type I have described.
It is important, then, for me to say something further about the conduct of regulatory litigation.
[1] See ALRC, Report 95, December 2002, 87 [2.108].
[2] Commonwealth, Company Director’s Duties: Senate Standing Committee on Legal and Constitutional Affairs, Parl Paper No 395 (1989).
[3] The civil penalty regime was introduced into the Corporations Act 1989 (Cth) by the Corporate Law Reform Act 1992 (Cth), with effect from 1 February 1993. See also Vicky Comino, ‘The Challenge of Corporate Law Enforcement in Australia’ (2009) Australian Journal of Corporate Law, 233, 234–5; Treasury, Australian Securities and Investments Commission Enforcement Review Report, 18 December 2017, 72.
[4] See, eg, Michelle Welsh, ‘Enforcing Contraventions of the Continuous Disclosure Provisions: Civil or Administrative Penalties’ (2007) 25 Corporate and Securities Law Journal 315, 318.
[5] For example, provisions concerning insider trading, continuous disclosure obligations, market manipulation, false trading and market rigging and dissemination of information about an illegal transaction. See, eg, Vicky Comino, ‘Civil or Criminal Penalties for Corporate Misconduct: Which Way Ahead?’ (2006) 34(6) Australian Business Law Review 428, 432–3 fn 37; Michelle Welsh, ‘Enforcing Contraventions of the Continuous Disclosure Provisions: Civil or Administrative Penalties’ (2007) 25 Corporate and Securities Law Journal 315, 318 fn 10.
[6] See Jasper Hedges et al, ‘An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia: Preliminary Findings’ (Working Paper No 3, Melbourne Law School, 31 December 2015), 9.
[7] See Corporations Act s 1317E. This number includes each subsection that is a civil penalty provision.
[8] The Bill that proposes to amend these Acts to insert the civil penalty provisions was passed in the House of Representatives on 29 November 2018, and read for the second time in the Senate on 3 December 2018.
[9] See Explanatory Memorandum, Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Cth), 43–6.
[10] As to the ASIC Act, see the unconscionable conduct and consumer protection provisions in Pt 2, Div 2, Sub–div G. As to the Credit Act, see the civil penalty regime in Pt 4.1. As to the Credit Code, see s 111. See generally, also, Treasury, ASIC Enforcement Review: Positions Paper 7 – Strengthening Penalties for Corporate and Financial Sector Misconduct, 2017, 37.
[11] See, eg, Corporations Act s 1317L; Rich v ASIC (2004) 220 CLR 129, 143–4 [27].
[12] See Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd (2003) 216 CLR 161, 198–9 [114]. It is now understood that civil penalties punish, but do not provide any form of retribution or rehabilitation: Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482, 506 [55]. See also ALRC, Report 95, December 2002, 72–3 [2.45]–[2.50].
[13] The Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543, 559 [31].
[14] The Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543, 553–4 [13]; Rich v ASIC (2004) 220 CLR 129, 141 [23].
[15] Briginshaw v Briginshaw (1938) 60 CLR 336, 362.
[16] Civil penalties were intended to be a feature of an enforcement regime that provided ASIC with gradations of sanctions, based on ‘strategic regulation theory’ and the enforcement pyramid model. See ALRC, Report 95, December 2002, 76 [2.60]–[2.61]; see also Anne Rees, ‘Civil Penalties: Emphasising the Adjective or the Noun’ (2006) 34 Australian Business Law Review 139, 140; Vicky Comino, ‘James Hardie and the Problems of the Australian Civil Penalties Regime’ (2014) 37(1) University of New South Wales Law Journal 195, 202.
[17] Transcript, James Shipton, 22 November 2018, 6930; Transcript, James Shipton, 23 November 2018, 6991.