Litigation (of any sort) must never be undertaken without a clear understanding of what the initiating party seeks to achieve. For a regulator alleging contravention of law, that means identifying what conduct it alleges, what law it alleges the defendant has contravened by that conduct, and how the alleged conduct amounted to a contravention. That is, at its most basic, the regulator:
- must know what case it seeks to make;
- must be able to prove the necessary facts; and then
- must be able to show how what was done breached the law.
Often, a regulator must choose how best to frame the case. Often the information available may reveal more than one, and often many, different contraventions of different provisions. What is the provision that best captures the true nature and character of what was done in breach of the law? Confronted with a mass of material, often relating to events that have occurred over a long period, what are the critical facts? How will those facts be proved?
Litigation takes time. It costs money and often great effort. There is always some uncertainty. What is to be made of time, cost and uncertainty? All three considerations will always be there. Why not avoid them? If a compromise can be reached without those risks, why not take it?
The answer lies in recognising that litigation of the kind now under consideration is the exercise of public power for public purposes. It is litigation by a public authority to enforce the law. A private plaintiff can always choose not to pursue, to abandon or to compromise that plaintiff’s private rights. A private plaintiff may take any of these steps for any reason or no reason. But altogether different considerations arise in connection with the public enforcement of the law.
Breach of the law carries consequences. Parliament, not the regulators, sets the law and the consequences. There are cases where there is good public reason not to seek those consequences. Prosecution policies have always recognised that there may be good public reasons not to pursue a particular case. But the starting point for consideration is, and must always be, that the law is to be obeyed and enforced. The rule of law requires no less. And, adequate deterrence of misconduct depends upon visible public denunciation and punishment.
The regulatory pyramid, to which so much reference has been made in evidence and submissions, reflects two very practical observations: not all contraventions of law are of equal significance; and regulators do not have unlimited time or resources. But it is wholly consistent with the analyses that are expressed by the metaphor of the regulatory pyramid, that serious breaches of law by large entities call for the highest level of regulatory response. And that is what has been missing. Too often serious breaches of law by large entities have yielded nothing more than a few infringement notices, an enforceable undertaking (EU) not to offend again (with or without an immaterial ‘public benefit payment’) or some agreed form of media release.
I remain of the view that breaches of the offence and civil penalty provisions of the financial services laws are not to be dismissed as ‘just a breach of those laws’ as if the laws governing the conduct of financial services entities are some less important form of law. The financial services laws regulate the conduct of central actors in the Australian economy. Their enforcement should be governed by the same principles that inform enforcement of the general law.
A regulator may go to court only if there is a proper basis for doing so. If ASIC has a reasonable prospect of proving contravention of the law, the starting point for its consideration of what to do must be that the consequences of contravention should be determined by a court. As I said in the Interim Report, this neither departs from the model litigant requirements set out in Appendix B to the Legal Services Directions 2017 nor precludes negotiation about resolving those proceedings.
Nor is it the case that a regulator is only permitted to commence proceedings when there are reasonable prospects of success. Paragraph 4.7 of the Legal Services Directions provides that an agency is not to start civil proceedings unless the agency has received written legal advice that there are reasonable grounds for starting proceedings. However, the requirement for ‘reasonable grounds’ directs attention to other factors, interests and considerations than just prospects of success. And so, there may be reasonable grounds for commencing a civil penalty proceeding where the issue raised is systemic or will assist to clarify the law, notwithstanding that the prospects of success may be uncertain.
Central to all of the observations I have made about litigation is the need for a regulator to decide what it seeks to achieve. Starting litigation, especially litigation to enforce the law, is not an end in itself. It is never more than a step towards some other end. What is that end? When starting enforcement proceedings the intended end must always be to demonstrate the alleged contravention and have the court impose a proper penalty.
The history of what has become known as the fees for no service issue demonstrates, in the clearest possible way, the need for visible public denunciation and punishment in deterring misconduct. So much appears from the following chronology:
- ASIC announced, in April 2015, that it was investigating ‘multiple instances’ of fees being charged for ongoing advice that had not been provided.
- ASIC published its report on the matter in October 2016.
- In April 2018, a few days before the Commission was first to take evidence about the issues, ASIC accepted EUs from ANZ and CBA (in respect of two of CBA’s advice licensees).
- In August 2018, the Commission took further evidence on the issues in connection with superannuation.
- In September 2018, ASIC began civil penalty proceedings against MLC Nominees Pty Ltd and NULIS Nominees (Australia) Ltd alleging contraventions of several statutory provisions in connection with the charging of certain advice fees.
Despite ASIC’s investigation, the evidence led in the Commission showed that some entities may have continued to charge fees for which no service was provided until the matters were examined publicly by the Commission. And no less importantly, the evidence of protracted negotiations between ASIC and entities about how entities would frame their remediation programs showed their unwillingness to accept that what they had done was wrong. Maintaining that kind of attitude would have been all the harder had a court decided the issue.
The time and cost of litigation can be measured when it ends. But the decision not to litigate also has time and cost implications. Not litigating does not guarantee faster resolution. Nor does it reduce the overall cost to the community if it means that the opportunity to deter further misconduct by litigation that denounces and punishes the original misconduct is not taken.
What then is to be made of the time, cost and risks of litigation?
Time and cost will be much affected by the precision of the case that is sought to be made. But beyond that, time and cost are inevitable features of litigation.
Risk is a different matter. Risk of failing on the facts is an ever–present danger in almost every form of litigation. So much turns on how the evidence is finally presented in court and perceived by the tribunal of fact. But proper preparation of litigation reduces litigation risk.
Proper preparation requires careful and dispassionate assessment of the questions posed earlier: What conduct is alleged to contravene what law in what respect? And then the relevant questions become: What are the critical facts? How will they be proved? In at least some past cases, there may be grounds to think that insufficient attention was given to these basic questions. If that is right, the solution lies in more precise case formulation and preparation. It does not provide any reason for responding to misconduct by asking ‘How can this be resolved by agreement?’. The relevant question in such a case must always be ‘Why not litigate?’.
Transcript, Gary Dransfield, 20 September 2018, 6321.
ASIC, Media Release 18-092MR, 6 April 2018; ASIC, Media Release 18-102MR, 13 April 2018; ASIC, Media Release 18-206MR, 6 July 2018.
Transcript, Gregory Martin, 11 September 2018, 5399.
FSRC, Interim Report, vol 1, 278.
FSRC, Interim Report, vol1, 278.
Exhibit 2.1, Witness statement of Peter Kell, 12 April 2018, Exhibit PK-2 [ASIC.0902.0001.0941].
ASIC, Report 499, 27 October 2016.
FSRC, Interim Report, vol 1, 124; Enforceable Undertaking, ASIC and ANZ, 29 March 2018, 5 [3.1]; ASIC, Media Release 18-092MR, 6 April 2018; Enforceable Undertaking, ASIC and CFPL and BWFA, 9 April 2018, 9 [3.5.5]; ASIC, Media Release 18-102MR, 13 April 2018.
ASIC v MLC Nominees Pty Ltd & Anor FCA, NSD1654/2018.
See the chapter about financial advice. See also, eg, Transcript, Linda Elkins, 15 August 2018, 4962–3.