ASIC: Biting off more than one regulator can chew

On 27 October 2022, the Senate referred an inquiry into the Australian Securities and Investments Commission (ASIC) to the Senate Economics References Committee for inquiry and report by the last sitting day in June 2024[1].

The report has now been released – full link here.

The committee was initially tasked with examining the capacity and capabilities of ASIC to undertake proportionate investigation and enforcement action arising from reports of alleged misconduct, with particular reference to (among other things):

• the balance in policy settings that deliver an efficient market but also effectively deter poor behaviour;
• whether ASIC is meeting the expectations of government, business and the community with respect to regulatory action and enforcement;
• the tools valuable to ASIC to meet those expectations disposal;
• the range of penalty offences and associated liability; and
• resourcing allocated to ensure investigations and enforcement action progress in a timely manner.

The committee conducted five public hearings and received over 200 primary and supplementary submissions. ASIC officials gave evidence at committee and Senate estimates hearings throughout the review process. The evidence received by the committee covered a range of issues regarding ASIC’s performance as Australia’s corporate regulator.

In its summation, the report notes that (among other things):

• ASIC is the centrepiece of Australia’s system of corporate and financial regulation and its responsibility for enforcing corporations law supports the health of the economy, promotes market integrity and protects consumers and investors;
• Australians expect that ASIC will investigate corporate misconduct promptly, take appropriate enforcement action and deter future breaches of the law; and
• ASIC’s capacity to respond to corporate misconduct is now compromised by significant structural, resourcing and cultural issues – the report notes that while its remit is one of the widest of any corporate regulators anywhere in the world, spanning over 95,000 entities of varying size and complexity, including 1,841 public companies, 6,288 financial services licensees and 1,183 securities dealers, the world fifth-largest pool of managed funds, totalling $4.75 trillion, and the fifth largest pool of retirement savings, totalling $3.9 trillion, it does so with a staff of less 2,000.

In the context of corporate insolvency, there was a particular set of identified issues that came out in the process, the most important of which (and no surprise to anyone working in the space) that most statutory reports that insolvency practitioners submit to ASIC  go without investigation.

This is so despite the fact that, as various evidence and recent statistics presented to the committee identified:

• 9,000 to 10,000 misconduct reports are made to ASIC each year;
• in 80 per cent of the cases where liquidators did provide a supplementary report, ASIC considered there ‘was insufficient evidence to warrant commencing a formal investigation’;
• conservative estimate of the deficiency of assets to liabilities—debt that will not be repaid to creditors—for companies that became insolvent in 2018–19 was over $8 billion. Of that, over $1 billion was owed to the Commonwealth in the form of unpaid taxes and charges;
• from 1 July 2022 to 30 June 2023 insolvencies of small to medium size entities resulted in 96 per cent of creditors receiving only 0 – 11 cents in the dollar;
• illegal phoenixing alone had an annual cost to the Australian community of more than $4 billion;
• despite recent law reform in this area, 10 per cent of recent company collapses across Australia are the result of illegal phoenix operators;
• there was a ‘virtual absence of enforcement action against directors for breaches of directors’ duties, insolvent trading or any other misconduct that results in or is related to the failure of a company’.

A case study of concern (among others) was the Greywolf Resources NL matter in which the report found that while between 2010 and 2022, ASIC received 22 misconduct reports in relation to Greywolf, in addition to five audit reports and one statutory report from a registered liquidator, ASIC appears to have taken limited action in response to Greywolf.  ASIC wrote to Greywolf in relation to concerns regarding misleading statements, failing to lodge financial reports, and fundraising disclosure. ASIC also commenced court proceedings against Greywolf for failing to lodge financial reports and discontinued the proceedings when Greywolf supplied the reports. However, ASIC stated that it did not pursue allegations of misconduct and was not aware of of investor losses at Greywolf until August 2022, when the Australian Broadcasting Corporation’s Four Corners program reported on significant instances of poor corporate conduct at Greywolf.

Ultimately, the committee’s report makes a series of 11 recommendations. Insofar as the insolvency landscape is concerned these included that the Australian Government:

1. should recognise that the ASIC has comprehensively failed to fulfil its regulatory remit;
2. should recognise that ASIC’s regulatory failures call into question whether its remit is too broad for it to be an effective and efficient agency, and the government should strongly consider separating its functions between a companies regulator and a separate financial conduct authority;
3. urgently address the shortcomings in Australia’s system for handling reports of alleged corporate misconduct. In doing so, the committee recommends that the Australian Government make it a legislative requirement of the Australian Securities and Investments Commission or future regulatory authorities to investigate reports of alleged misconduct at an appropriate rate.
4. A corollary of this latter recommendation was that:
   1. the regulator develop consistent standards to transparently report data to the public on the handling of reports of alleged misconduct; and
   2. the regulator establish service standards to require that people who submit reports of alleged misconduct are provided with clear, detailed and timely information on the tangible actions taken in response to their report.

The extent to which these recommendations are adopted and give rise to real reform are clearly of real interest to those of us working in the restructuring and insolvency space and for the creditors and other stakeholders dealing with the reality of corporate failure. A further update will be provided in due course.

[1] which date was extended to 3 July 2024.