House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, The Hon Josh Frydenberg MP)

Chapter 1 Financial Sector Reform (Hayne Royal Commission Response - Stronger Regulators (2019 Measures)) Bill 2019

Outline of chapter

1.1 This Bill implements recommendations from the ASIC Enforcement Review Taskforce Report.

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Chapter 2 of the ASIC Enforcement Review Taskforce Report contained recommendations to harmonise and enhance ASIC's search warrant powers.

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Chapter 3 of the ASIC Enforcement Review Taskforce Report recommended that ASIC should be able to receive telecommunications intercept material to investigate and prosecute serious offences.

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Chapter 5 of the ASIC Enforcement Review Taskforce Report contained recommendations to strengthen ASIC's licensing powers.

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Chapter 6 of the ASIC Enforcement Review Taskforce Report contained recommendations to extend ASIC's banning powers.

Context of amendments

The establishment of the ASIC Enforcement Review Taskforce

1.2 On 19 October 2016, the Government established the ASIC Enforcement Review Taskforce in response to Recommendation 29 of the Financial System Inquiry Final Report.

1.3 The ASIC Enforcement Review Taskforce was established to review the enforcement regime available to ASIC and assess the suitability of the existing regulatory tools ASIC uses to perform its functions.

1.4 In reviewing the matters outlined in its terms of reference, the ASIC Enforcement Review Taskforce made a number of recommendations to:

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address gaps or deficiencies to allow more effective enforcement of ASIC's regulatory regime;

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foster consumer confidence in the financial system and enhance ASIC's ability to prevent harm effectively;

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promote engagement and cooperation between ASIC and its regulated population without imposing undue regulatory burden on business; and

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promote a competitive and stable financial system that contributes to Australia's productivity and growth.

The ASIC Enforcement Review Taskforce's findings

1.5 On 18 December 2017, the ASIC Enforcement Review Taskforce provided its final report to Government. The final report contained 50 recommendations in total.

1.6 The ASIC Enforcement Review Taskforce grouped its recommendations into eight broad themes:

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enhancing the requirement for financial services and credit licensees to report significant breaches to ASIC;

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harmonising and enhancing search warrant powers;

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providing ASIC with access to telephone intercepts for the investigation and prosecution of corporate law offences;

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shifting to a co-regulatory model in appropriate cases where industry participants are required to subscribe to an ASIC approved code;

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strengthening ASIC's licensing powers;

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extending ASIC's banning powers to ban individuals from managing financial services businesses;

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strengthening penalties for corporate and financial sector misconduct; and

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providing ASIC with a directions power to complement ASIC's current powers to regulate an AFSL holder's or credit licensee's systems and conduct.

1.7 On 16 April 2018, the Government responded to the ASIC Enforcement Review Taskforce. This Bill implements the recommendations to:

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harmonise ASIC's search warrant powers;

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improve ASIC's ability to access certain telecommunications information;

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strengthen ASIC's licencing powers; and

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extend ASIC's banning powers to ban individuals from managing financial services businesses.

Harmonisation and enhancement of ASIC's search warrant powers

1.8 Chapter 2 of the ASIC Enforcement Review Taskforce Report contained recommendations to harmonise and enhance ASIC's search warrant powers to eliminate inconsistencies and deficiencies that exist between its various powers.

1.9 Search warrants are an important and effective regulatory tool for obtaining information. They are widely used by a range of enforcement agencies and regulatory authorities.

1.10 ASIC currently has a range of search warrant powers contained in the ASIC Act, the Credit Act, the Retirement Savings Accounts Act 1997 and the Superannuation Industry (Supervision) Act 1993 . ASIC may also apply to a magistrate for a search warrant under the Crimes Act 1914 for execution by the Australian Federal Police and/or state police.

1.11 These recommendations were that:

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ASIC-specific search warrant powers in various acts should be consolidated into the ASIC Act (Recommendation 11);

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ASIC Act search warrants should provide for search and seizure of 'evidential material' (Recommendation 12);

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ASIC Act search warrant powers should include ancillary powers that mirror the Crimes Act 1914 provisions (Recommendation 13);

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ASIC Act search warrants should only be issued when there is a reasonable suspicion of a contravention of an indictable offence (Recommendation 14);

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material seized under ASIC Act search warrants should be available for use in criminal, civil and administrative proceedings for as long as is reasonable and practicable (Recommendation 15); and

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use of material seized under search warrants by private litigants should be subject to appropriate limits (Recommendation 16).

1.12 The recommendations address a number of inconsistencies and deficiencies identified in ASIC's existing search warrant powers, which limit the usefulness of warrants, and restrict ASIC's ability to use material it seized.

ASIC's access to telecommunications intercept material

1.13 Chapter 3 of the ASIC Enforcement Review Taskforce Report recommended that ASIC should be able to receive telecommunications intercept material to investigate and prosecute serious offences.

1.14 The TIA Act sets out a regime that enables agencies to access various forms of telecommunication information in prescribed circumstances. This regime has different levels of access, with agencies that are designated 'interception' agencies able to seek warrants to intercept telecommunications for the purpose of investigating serious offences.

1.15 Interception agencies are subject to a range of strict controls in how they access and use telecommunications intercept information. Interception agencies must apply to an eligible judge or nominated member of the Administrative Appeals Tribunal for a telecommunications intercept warrant.

1.16 Interception agencies may also share information they have obtained with other 'recipient agencies' if the material appears to relate to a matter that could be investigated by the recipient agency.

1.17 However ASIC is not an interception agency or recipient agency under the TIA Act. This is despite the fact that the definition of 'serious offence' in the TIA Act includes offences against provisions of the Corporations Act 2001 relating to insider trading, market manipulation and financial services fraud, as well as other fraud offences that are commonly investigated and prosecuted by ASIC.

Strengthening ASIC's licensing regimes & penalties for false and misleading documents

1.18 Chapter 5 to the ASIC Enforcement Review Taskforce Report contained recommendations to strengthen ASIC's licensing powers and the offences for false and misleading documents.

1.19 Part 7.6 of the Corporations Act 2001 governs the licensing of financial services providers. A person who carries on a financial services business in Australia must hold an Australian financial services licence, subject to certain exemptions. These applications are made to, assessed and granted by ASIC.

1.20 ASIC is also responsible for granting an Australian credit licence under Part 2-2 of the Credit Act.

1.21 The Financial System Inquiry Final Report ^[1] identified a number of gaps in the current Australian financial services licensing and Australian credit licensing regimes and recommended the Government strengthen these regimes so that ASIC can deal more effectively with poor behaviour and misconduct.

1.22 In particular, the Financial System Inquiry Final Report identified limitations in ASIC's ability to:

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assess the suitability of entities that control an Australian financial service licence or Australian credit licence;

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consider previous conduct in other businesses in determining whether an applicant will satisfy the fit and proper test; and

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impose conditions on firms to address concerns about internal systems relating to serious or systemic misconduct.

1.23 In response to the identified issues, the ASIC Enforcement Review Taskforce made the following recommendations:

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new applicants will be required to provide information on all controllers and ASIC may refuse to grant a licence if any controllers are found to be not fit and proper (Recommendation 23);

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ASIC will be given the power to cancel a licence if the licensee fails to commence financial services activities within six months (Recommendation 24).

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ASIC may refuse to grant a licence if the applicant makes a materially false and misleading statement in an application (Recommendation 25);

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require applicants to confirm there have been no material changes to information provided in an application before a licence is granted (Recommendation 26);

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align the assessment requirements for Australian Financial Services and credit licence applications (Recommendation 27);

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licensees will be penalised if they fail to notify ASIC of an actual change of their controllers within 30 business days (Recommendation 28); and

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align the consequences for making false and misleading statements to ASIC in Australian financial services and credit contexts (Recommendation 29);

1.24 These recommendation about aligning the consequences for making false and misleading statements included removing the specific provision in the Corporations Act 2001 that applies to false or misleading statements made in AFS licence applications (so that the provisions can have broader application), as well as other amendments to ensure:

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recklessly making or authorising a false or misleading statement or material omission is prohibited;

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a person who makes or authorises a statement in a document submitted to ASIC must take reasonable steps to ensure the document does not contain a false or misleading statement or material omission;

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authorising a statement in an AFS licence application that is false or misleading or contains a material omission is prohibited;

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consistency between the various penalties for misleading ASIC, based on the penalties that apply for false and misleading statements in the Credit Act.

Extending ASIC's power to make banning orders

1.25 Chapter 6 of the ASIC Enforcement Review Taskforce Report contained recommendations to foster public confidence in the integrity of individuals who work in the financial sector by extending ASIC's banning powers.

1.26 Division 8 of Part 7.6 of the Corporations Act 2001 authorises ASIC to ban certain persons from providing financial services. Equivalent provisions for banning certain persons from engaging in credit activities are contained in the Part 2-4 of the Credit Act.

1.27 These recommendations were that:

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Once an administrative banning power is triggered, ASIC should be able to ban a person from performing a specific function, or any function, in a financial services or credit business. (Recommendation 30).

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The grounds for exercising ASIC's power to ban individuals from performing roles in financial services and credit businesses should be expanded (Recommendation 31).

1.28 These recommendations address two deficiencies in ASIC's existing banning powers that were identified in the ASIC Enforcement Review Taskforce Report and previously in the Financial System Inquiry Final Report ^[2] and the Senate Final Report on the Performance of the Australian Securities and Investments Commission . ^[3]

1.29 The first issue relates to the scope of ASIC's existing banning powers under the Corporations Act 2001 and the Credit Act. Although these powers permit ASIC to ban a person from providing a financial service or engaging in credit activities, they do not authorise ASIC to ban a person from controlling or managing a financial services or credit business.

1.30 The second issue relates to the grounds on which ASIC can make a banning order. As noted in the ASIC Enforcement Review Taskforce Report, the existing provisions may not necessarily authorise ASIC to ban persons such as a director or senior manager of a financial services or credit business.