ASIC recently released its enforcement report for the period 1 July 2015 to 31 December 2015. The report highlights ASIC’s key area of focus. Integrity of financial market benchmarks remains a high enforcement priority, as does disclosure obligations and market abuse.
ASIC’s key areas of focus include issues relating to:
- poor culture
- illegal phoenix activity
- retail margin FX trading; and
- increases in data volume and associated technology.
ASIC is concerned about the culture within the financial services industry because it is a key driver of conduct. ASIC believes poor conduct within the financial industry over the past few years has significantly eroded trust and confidence of investors and financial consumers.
The poor conduct was stated as having spanned activities relating to: the provision of poor advice (in both large institutions and smaller firms) and the mis-selling of financial products and services to investors and consumers as well as suspected financial benchmark and FX manipulation, both in Australia and overseas. ASIC’s work in this area continues to be focussed on acting as a gatekeeper of culture and conduct and where appropriate, taking enforcement and other regulatory action.
Illegal Phoenix Activity
In recognising that the cost of illegal phoenix activity in Australia is high for employees, business and taxpayers, ASIC will target company directors with a history of being involved in failed companies, as part of its surveillance program to combat illegal phoenix activity, together with its:
- construction industry statutory declaration campaign; and
- proactive phoenix and registered liquidator surveillance programs.
Retail Margin FX Trading
ASIC has seen an increase in the number of applications for an AFS licence to operate a retail margin FX broker business in Australia, many with the objective of ultimately operating in the Asian marketplace.
Given that FX trading often involves leverage and is potentially a risky form of retail investment, ASIC is undertaking proactive surveillance activities to ensure that FX brokers are meeting their AFS licence requirements, and will continue to educate retail investors about the risks involved in FX trading.
ASIC is especially focussing on FX brokers that are not adequately disclosing the risk of trades to their clients, as well as ensuring that they are capable of managing their own risks and conflicts of interest.
Increase in Data Volume and Associated Technology
ASIC acknowledged that increasing volumes of electronic forensic data and the use of technology such as encryption, cloud computing, virtualisation and new technological devices are creating challenges for law enforcement agencies around the world. ASIC noted that it is regarded as a leading regulator in the field of digital forensics and is committed to maintaining its capability through ongoing investment, capacity building and inter-government cooperation to ensure that it remains at the forefront of developments in digital forensics and technology.
ASIC also made mention of the increases in data volume that has been seen during the evidence-gathering stage of their investigations. ASIC has found there has been an increase in volume over the past three (3) years, and this is likely to continue. ASIC estimates that by 2020, they will receive 425 terabytes (TB) of data per year.
Next 6 months
ASIC’s enforcement activity focus for the next 6 months from January to 30 June 2016 will be on the following types of misconduct:
- Market Integrity
Conduct risk and the integrity of financial market benchmarks remain a high enforcement priority. ASIC remains committed to ensuring that disclosure obligations by entitles and market abuse are addressed through enforcement actions. ASIC is currently litigating 16 market integrity related cases of which 11 involve criminal sentencing.
- Corporate governance
ASIC will continue to focus on:
- companies with poor corporate governance;
- issues concerning related party transactions;
- inadequate company disclosure; and
- financial reporting and accounting fraud.
ASIC will also continue its work in ensuring auditors and insolvency practitioners adhere to the highest standards and, where necessary, will take action against practitioners who fail to meet them. ASIC is currently litigating 45 cases related to corporate governance of which 18 may involve criminal sentencing.
- Financial services
As part of the ASIC Wealth Management Project, ASIC are currently conducting a significant number of investigations and risk-based surveillances targeting a range of misconduct, including charging clients for financial advice where no advice was provided and compliance with the Future of Financial Advice (FoFA) laws. The project will continue its investigations and surveillance in pursuing a range of regulatory outcomes. Currently ASIC is litigating 62 cases relating to financial services of which 19 may involve criminal sentencing and 20 relate to dishonest conduct and misleading statements.
Other work ASIC has classified as important in this report is the ongoing progression of court proceedings commenced by ASIC to wind up land banking schemes and their developers or promoters. Land Banking is the real estate investment scheme involving the acquisition of large blocks of land by a promoter. Land Banking is real state investment scheme involving the acquisition of large blocks of land by promoters or developers of the scheme – often in underdeveloped rural areas who then offer portions of the land to investors. Investors either purchase a lot in the land under a standard real estate contract of sale or acquire an option to purchase a lot of land in an unregistered plan of subdivision.
ASIC’s main concerns relate to:
- the representations made about the scheme;
- that the projects constituted financial products and/or managed investment schemes; and
- the use of the money invested in the projects.
To view the full report, click here.
Sophie is the director of both Sophie Grace Legal Pty Ltd and Sophie Grace Pty Ltd. Sophie has worked with some of Australia’s largest financial services organisations in compliance, legal and operational roles. She has also worked with small businesses to provide tailored solutions with a strong understanding of business practicalities as well as obligations to regulators.