Low penalties, high costs: ASIC needs legislative reform

ASIC Commissioner Greg Tanzer has this week faced the scrutiny of a Senate committee hearing. AAP/Paul Miller

In 2005, the Federal Court faced the difficult task of arriving at a penalty for Steve Vizard after he was found in breach of his duties as a director of Telstra.

In his judgment, Raymond Finkelstein criticised the level of penalty allowed under the Corporations Act and recommended that the upper limit of A$200,000 be reconsidered.

This week the Senate Economic References Committee is considering the performance of ASIC with public hearings in Sydney and Canberra. Regrettably, nearly a decade after the Vizard case, nothing has changed.

ASIC is often subject to pointed criticism for its perceived failures in policing the “big end of town” and its lack of timely, or sometimes any, intervention in matters that have attracted considerable media and public attention.

Some of these criticisms are well founded. But it should also be remembered that ASIC’s powers and functions are determined by its legislative framework. And that framework is overdue for reform.

Insignificant penalties

The upper limit of the penalty for directors and officers who breach their duties under the civil penalty scheme is still $200,000. This is without doubt a considerable sum.

But it does not lead to significant fines for individual directors who breach their duties.

In recent key cases the courts levied fines at the lower end of the spectrum. In the James Hardie litigation, for example, the Court of Appeal reduced the penalties imposed by the trial judge from $30,000 to $25,000 for the Australian directors and to $20,000 for the US directors.

These directors had breached their duties of care by approving a false and misleading announcement.

The non-executive directors in the Centro case also breached their duties of care by approving the financial statements of the company despite a significant misclassification of the company’s debt. There was no fine imposed, in part due to the significant reputational damage they suffered.

It is perfectly clear from these and other cases that without legislative intervention to raise the upper limit of the penalty, we will continue to see relatively insignificant penalties handed out to directors.

While ASIC doesn’t suggest specific figures, it does make a submission based on the range currently available and within the parameters established by the legislation and the courts in previous cases.

It is proper that the courts weigh up a number of factors when arriving at an appropriate penalty. It is also fair that attention be paid to the reputational damage and embarrassment suffered by those who come before the courts.

However, it is notable that in the James Hardie case the fines for the Australian directors represented less than 40% of their directors’ fees in the year that they breached their duties.

In the Centro matter, the non-executive directors’ fees for the year in question ranged from $104,000 to $389,000.

The influence of the parity principle – that similar breaches should attract similar penalties – means that it is unlikely the courts will feel free to depart from the approaches in these cases without a circuit breaker.

Amending the legislation is the only way to change this pattern.

Sky-high court costs

The level of penalty is not the only area of the legislative framework ripe for reform. Other obstacles faced by ASIC include a cumbersome and costly civil penalty scheme where cases can cost many millions.

To ensure defendants aren’t exposed to penalty during proceedings, they aren’t obliged to specify their defences until ASIC’s case has closed.

As a consequence, ASIC is forced to plead all possible alternatives, increasing the complexity of its case and the time required to present it in court. Unsurprisingly, court time is wasted and costs escalate alarmingly.

For example, the costs incurred in the recent Fortescue case have been estimated at A$30 million. Even before heading to the High Court, the total cost of the James Hardie litigation was said to be over $35 million.

In the Senate Committee hearings ASIC Chairman Greg Medcraft gave evidence that the Storm Financial debacle had so far cost ASIC $50 million.

Unless ASIC has accessible, efficient and powerful options that can be pursued through the courts, its position as the key regulator of companies and markets is undermined. This has inevitable consequences for all of us, as we are all now compulsorily investing through our superannuation schemes.

As the Senate Economic References continues to examine the performance of ASIC, it has an opportunity to recommend some real practical changes that can improve that performance. It’s an opportunity to act in the public interest that should not be missed.