ASIC’s new approach to regulatory investigations: the challenges and opportunities presented by Express Investigations

Under the banner of ‘when pilots become enduring practice’, ASIC Deputy Chair Karen Chester has announced that ASIC will supplement its traditional investigations processes with ‘Express Investigations’ (EI), ASIC’s new and preferred approach to enforcement.

Corporate regulatory investigations are often legally and factually complex, high-stakes and process-heavy. Mountains of documents and witness evidence are commonplace. They are known to follow an orthodox path, despite having greater uncertainty of outcome and potentially more twists and turns than commercial litigation.

As such, EI is a significant development which could substantially curtail the time spent in investigative processes by seeking to produce an outcome in six months or less, resulting in quicker compensation for any adversely affected consumers, and enhancing the general deterrence effect of enforcement action by increasing the timeliness of case guidance for the market.

The details are yet to be spelled out but it is clear from Karen Chester’s speech at the AFR Summit on 10 March, that it is reliant upon the cooperation of target entities, and (although not stated expressly) if they decline, ASIC will have no hesitation in utilising its substantially enhanced powers and penalties instead.

This will move the ASIC enforcement approach to one similar to that used by the ACCC or DPP, which rely upon early admissions or pleas and agreed fact statements in Court, to secure penalty reductions. Ms Chester confirmed in response to a question, that this approach will involve abandonment of enforceable undertakings (ASIC’s erstwhile mainstay for negotiated outcomes, which was criticised in the Banking Royal Commission).

Key EI takeaways

• EI has been developed in consultation with the five largest financial institutions since the Hayne Royal Commission concluded in 2019 and ASIC considers it has ‘traction’ with those consulted.
• ASIC will expand EI progressively to the broader cohort of entities it investigates taking a harm-based approach to misconduct, rather than focus efforts on harm-free breach processes – signalling a split-level regulatory approach.
• EI is intended to reduce the time and costs for entities in responding to investigations, by ASIC setting out its concerns at the earliest possible time then cooperating with the target of the investigation through regular and consistent engagement.
• EI encourages greater emphasis upon voluntary provision of information by the target to enhance ASIC’s understanding of the issue and improved compliance rates for compulsory document production. It has also involved agreeing facts and admissions of liability in some matters, without costly litigation.
• Cost savings can be high – in the order of 70% with corresponding time savings in the case example used by Ms Chester.
• ASIC is not, however, abandoning traditional investigations – ASIC will continue its standard investigation process where cooperation has waned or is lacking.
• ASIC’s policy when using EI is ‘one strike and you’re out’, which may be the key to understanding what EI will look like in practice.

ASIC’s new approach to investigations

At first blush, EI appears contrary to the “Why not litigate?” approach ASIC adopted in the aftermath of the Hayne Royal Commission, but seen in context ASIC is not signalling a desire to resolve instances of apparent misconduct by agreement, as is evidenced by the fact that ASIC announced five new court proceedings in the two weeks before the Deputy Chair’s speech.[i] So, EI does not represent a shift in thinking away from the focus on punitive measures – it will enable it to move to this stage more quickly with admissions or pleas.

Likely features of EI

1. 1. Concessions for cooperation: ASIC will likely be focused on achieving an outcome that includes, at least, acknowledgements (and more likely admissions) of actual wrongdoing to an extent that makes the need to prove a case before a court redundant, by discounting or negotiating more favourable penalty outcomes than may otherwise be achieved from litigation. ASIC is likely to expect companies to move quickly, despite reservations as to their overall exposure (financial and reputational).
   2. High stakes for recalcitrant entities: EI ups the ante for entities under investigation. While entities will need to weigh making swift, likely not fully tested, concessions / admissions against larger risks (such as claims exposure), the ‘one strike and you’re out’ policy indicates they will also need to weigh in the significant risks of:
      1. ASIC conducting a drawn-out, wide-ranging, expensive investigation with a greater likelihood of litigation as a test case; and
      2. coming under greater, more frequent regulatory scrutiny for being perceived as uncooperative.
   3. Agreeing remediation will not be a proxy for cooperation: EI is primarily focused on quick concessions of misconduct in the expectation that compensation to consumers will naturally be expedited.
   4. Emphasis on electronic document solutions: Entities will be expected to move quickly in the EI process, or lose the opportunity for, and benefits of, cooperation with ASIC. So they will need to be clear on the facts of the potential misconduct and their legal positon/exposure quickly, while delivering up critical documents to ASIC in real time. Entities that are ahead of the curve on the facts are likely to fare far better in guiding the EI to a swift conclusion.

Processing potentially significant volumes of documents quickly and getting to the heart of matters with primary witnesses will also be of heightened importance. Increased use of technological and artificial intelligence solutions, is likely to be key for entities under the pressure of an EI.

Conclusion

ASIC’s introduction of EI appears to be a step toward tougher regulation, utilising its enhanced powers and penalties as leverage, rather than a renewed focus on achieving outcomes through agreement.

EI is about how ASIC proposes to conduct investigations and create inducements for early cooperation. EI can be expected to be the means by which ASIC identifies entities with inherent cultural issues, based on whether they cooperate or not with ASIC when approached, which will enable ASIC to take a more targeted approach to perceived recalcitrant and subjecting them to greater, ongoing scrutiny.

EI creates new strategic challenges for entities involved in ASIC investigations but, well-organised, well advised entities, will be able to use EI to create opportunities to help shape the investigation process and outcomes, emerge stronger (culturally, financially and from a reputation perspective), and better-positioned for future regulatory engagement.

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Authored by:

Edward Martin, Partner
Kate Mills, Partner
James Macdonald, Senior Associate

[i] ASIC has commenced civil penalty proceedings against NAB, CommSec and AUSIEX, and REST and, on referral from ASIC, the Commonwealth Director of Public Prosecutions is pursuing criminal charges against Alliance and AWP.