Wed Jul 3

ASIC has comprehensively failed and its role should be split in two, according to long-awaited report

Written by: Jason Harris, Professor of Corporate Law, University of Sydney

Australia’s corporate watchdog, the Australian Securities and Investments Commission ^[1] (ASIC), should be broken up and replaced by new and more responsive regulatory agencies, a damning report has found.

The Senate Economics References Committee handed down its 200-page report ^[2] Tuesday evening after a 20-month inquiry into the corporate regulator.

The inquiry involved five days of public hearings and 198 submissions from the Australian Tax Office (ATO) and an array of other financial, accounting and legal interest groups.

The report calls for greater transparency and accountability from ASIC and a fundamental change to how it approaches enforcement.

It highlights three major problems.

1. Impossibly broad responsibility

The scope of ASIC’s responsibility is impossibly broad and it has not shown it can effectively fulfil its mandate.

While ASIC is chronically under-resourced when compared with other corporate regulators like the Securities and Exchange Commission ^[3] in the United States, ASIC’s repeated governance failures and lack of public accountability mean giving it more money won’t necessarily solve the problem

2. A gun-shy regulator

ASIC is a gun-shy regulator that is constantly reacting to public criticism and fumbling its caseload, rather than getting on with the job of investigating and punishing serious misconduct in our financial markets.

ASIC has taken its eye off the goal of addressing serious misconduct, perhaps because it is too scared to lose when it does take action.

It proudly trumpets its 97% litigation success rate in its annual reports ^[4], but this speaks to a regulator not taking on challenging cases and a regulator that is running the same type of matter over and again.

Committee chair Liberal senator Andrew Bragg who led the inquiry. Mick Tsikas/AAP ^[5]

ASIC’s approach to public accountability is to deflect criticism and use a highlights package of sample enforcement actions in its reports to justify its existence. Meanwhile tens of thousands of reports of potential misconduct are ignored.

The report notes that ASIC is simply not using the information it receives about potential misconduct effectively. ASIC takes action in less than 1% of its reports of misconduct from insolvency practitioners alone. When questioned by the Senate committee about enforcement activities, ASIC steadfastly refused to comply with requests for information.

The corporate regulator should be independent from the government, but no-one should be immune from the scrutiny of parliament.

3. A flawed approach

ASIC’s approach to responding to reports of misconduct is fundamentally flawed. It derides reports of misconduct as mere complaints, stating that it is not a complaint handling body.

Many reports of misconduct are dismissed almost immediately. For decades, it has failed to provide accurate and timely information about its enforcement activity, as it changes how it reports enforcement actions and outcomes from year to year.

This makes it impossible to hold it accountable or to identify precisely what actions ASIC is and isn’t bringing. ASIC’s funding and staffing have increased over the past 10 years, but its enforcement activity has seen little change or increase.

Empirical studies show that ASIC only litigates a small number of provisions in the Corporations Act 2001 each year. The number of directors that ASIC bans each year for misconduct has barely changed in the past 20 years.

What the report says should happen next

The report makes 11 recommendations that call for ASIC to be broken up and for major governance changes inside the corporate cop.

ASIC commissioners frequently state they are one of the most active corporate regulators in the world and they are very effective at addressing corporate fraud and misconduct.

But this was rejected by the Hayne Royal Commission ^[6] into the Banking and Financial Services industries which reported in 2019 that ASIC had consistently failed to take action against large financial institutions.

The inquiry started in October 2022 and took 20 months to complete. Dean Lewins/AAP ^[7]

It also found the commission was too reliant on low level sanctions and agreed enforcement outcomes and it simply did not bring enough court cases to address serious misconduct.

ASIC responded at the time that it would bring a “why not litigate?” approach and then quickly backed away from that stance once the COVID pandemic hit.

Nothing has changed

This latest report shows nothing has changed since the royal commission. ASIC is too slow (often taking years to respond to reports of wrongdoing), too clumsy (failing to respond quickly enough to changes in market behaviour), doesn’t always pick the right cases to run.

Even when it “wins”, it often settles for low-level enforcement measures.

The serious financial and corporate crooks have little to fear from ASIC it appears.

This is a regulator that is stultifying under ineffective governance and a mandate so broad that it can point to almost any action as being relevant to its duties.

The inquiry’s final report shows it is not simply a matter of more enforcement being needed but also ensuring that ASIC is responding in the most appropriate way.

ASIC as an omnibus corporate regulator for everything, is a failed regulatory experiment. It is not simply a watchdog with no bite, but even worse, a watchdog chasing its own tail.