Australian Securities And Investments Commission Research Articles

'Carrying on Business in Australia': A Study of Court Judgments

The concept of carrying on business in Australia appears frequently in Australian legislation and can have significant implications for those whose activities fall within its parameters. The purpose of this research note is twofold. The first is to explain why the concept of carrying on business in Australia is important, both by reference to the frequency with which the phrase or variants of it are found in Australian legislation, and also by reference to the key obligations imposed on those found to be carrying on business in Australia under the Corporations Act 2001 and the Competition and Consumer Act 2010. For instance, under the Corporations Act, a foreign company must not carry on business in Australia unless it is registered with the Australian Securities and Investments Commission (ASIC). Once registered, the foreign company has numerous obligations, including to lodge certain financial information annually with ASIC and to have a registered office in Australia. In addition, the territoriality of certain provisions of the Corporations Act, including the directors' duties provisions and insider trading provisions, can depend on whether a business is carried on in Australia. The second purpose of the research note is to identify the factors that are relevant to determining when a business is carried on in Australia, based on an analysis of the case law in which courts have considered the concept.

An Analysis of ASIC Enforcement Against Auditors and Liquidators

The Australian Securities and Investments Commission (ASIC) has emphasised the importance of its enforcement role in relation to auditors and liquidators. However, there is little detailed analysis of what enforcement action ASIC has undertaken against auditors and liquidators. Using several sources (ASIC enforcement reports, ASIC media releases, ASIC regulation of registered liquidator reports, and reports of the Companies Auditors Disciplinary Board and its predecessor), the authors analyse ASIC enforcement outcomes against auditors and liquidators between July 2011 and December 2019. The findings include (1) a particularly strong emphasis by ASIC on negotiated enforcement outcomes and administrative remedies rather than court based outcomes; (2) within these negotiated outcomes, a strategy to employ undertakings regarding professional education and independent review of the auditor’s or liquidator’s practice with the objective of improving the practice; (3) a particular enforcement focus on self-managed superannuation fund auditors; and (4) very limited use by ASIC of the Companies Auditors Disciplinary Board.

The Effectiveness of Disclosure Law Enforcement in Australia

This article examines the empirical incidence of the private and public enforcement of disclosure laws in Australia. Disclosure laws aim to ensure the reduction of information asymmetries and the accuracy of share prices, but their success is predicated on enforcement. In order to assess the enforcement landscape, this article presents two new datasets comprising both private class actions and public enforcement for further examination. The analysis indicates that 41% of all Federal Court actions filed within the dataset included allegations relating to continuous disclosure failures. Further, regarding in-court actions, private enforcement predominates. This is consistent with theory, which suggests that coordination costs may be expected to affect the likelihood of private enforcement by shareholders. Regarding public enforcement, the action types predominantly consist of administrative sanctions as opposed to litigation. There were 22 actions initiated by the Australian Securities and Investments Commission (ASIC) over the study period, which included civil and criminal penalties, infringement notices, and enforceable undertakings. This article additionally provides an outlook on enforcement since the judicial approval of litigation funders, which removed numerous procedural barriers to class actions. This allows for an analysis of the impact of these procedural changes, which occurred in parallel to ASIC resource decreases. Perhaps surprisingly, 100% of the cases in the dataset are supported by commercial litigation funding agreements. Moreover, the empirical analysis of settlement findings in the dataset indicates that the degree of investor loss coverage is tiny. Where settlement data and stock decline information is available, taking into account legal costs and litigation funder commissions, the mean net recovery amount is less than 4% of the market decline. This level of compensation can be compared with US figures, indicating a median settlement to investor loss coverage of 2.6% in 2017 and 2018. In light of the findings, this article addresses the question of whether the Australian system of enforcement is effective, by reference to whether the enforcement actions compensate, deter, and signal. The empirical analysis confirms the signalling function of enforcement, shows that there is likely to be a reasonable degree of deterrence where directors are targeted, however, that the compensation rationale is not met. This results in a moderately effective enforcement framework with notable room for improvement across both modalities of enforcement. Overall, the significance of both modalities of disclosure law enforcement implies that inferences about a system drawn solely from either public or private enforcement are likely to be misleading.

Capital Raising by Companies During the COVID-19 Crisis: An Analysis of Recent ASX Reforms

The effects of the COVID-19 crisis have driven many listed Australian companies to raise emergency capital. These share issues have been facilitated by a relaxation of the rules applying to capital raising by the Australian Securities Exchange, a move supported by the Australian Securities and Investments Commission. The reforms to the rules draw on the experience of the financial crisis in 2008 - 2009. They are designed to assist companies adversely affected by the COVID-19 crisis to raise capital to survive the crisis. The nature of the reforms and the capital raisings to which they relate have been the subject of competing concerns. In particular, the enhanced disclosure requirements that have accompanied the relaxation of the capital raising rules have been criticised by some as unwarranted and by others as insufficient. In this research note, the authors provide information on the number of capital raisings since the beginning of COVID-19 and evaluate the competing arguments regarding the recent capital raising reforms.

External auditors' evaluation of a management's expert's credibility: Evidence from Australia

The Australian Securities and Investments Commission (ASIC) has concerns that auditors are not adequately evaluating the reliability of the work of management's experts (MEs). We interviewed nine experienced auditors to understand how auditors evaluate MEs. We observe that some factors specified by auditing standards, such as an ME's competency in accounting standards, geographical location of the subject matter or the ME, and the sourcing of an ME play a minor role in an auditor's evaluation of an ME's credibility. In contrast, the reputation of an ME's firm is a key determinant. Auditors corroborate information from multiple sources, but verify only the ME's professional qualification. We identify three potential reasons for the ASIC's concerns: “Experts are considered cognitive authorities,” “Documentation is the key,” and “Move from a risk‐based approach to a checklist approach.”

Impact Analysis: ASIC is Firm About Psychologists in Board Rooms

The Australian Securities and Investments Commission (ASIC) Chairman, Mr James Shipton, has “dug his heels in” and is moving forward on his experimental plan to place psychologists into board rooms, on a “voluntary basis”, despite mounting criticism from regulators and behavioural experts. A similar program was used by the Dutch Central Bank and, while short-comings were evident, overall it was seen as a success.

Loss of ‘Unattended Property in a Public Place’ – Testing the Good Faith of the Travel Insurer

Published in (2019) 47 Australian Bar Review 49 Travel insurance policies require insureds to take adequate precautions to protect their personal property including their luggage. They exclude cover for the loss or theft of personal property which has been left ‘unattended in a public place’. The relevant authorities on this exclusion including the often-cited decision by Lord Denning in the Starfire Case in the UK in 1962 would appear to give the final word to the insurer. However, caselaw is mixed and shows that a determined insured would have a good chance of success on appeal. The fact that insurers regularly reject claims which are successful on appeal is another example of the conduct of the finance sector falling below community standards and expectations as demonstrated in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Australia, 2018-2019). Wrongly rejecting claims can expose the insurer to several potential legal liabilities at common law and under statute. This article recommends deleting the intricacies of the standard exclusion for property being left ‘unattended in a public place’ in favour of the standard policy condition that the insured must take adequate precautions to protect their personal property. It also recommends amendments to the Corporations Act 2001 (Cth) to empower the Australian Securities and Investments Commission (ASIC) to regulate the claims procedures of insurers.

The Hayne Royal Commission and Trust Issues in the Regulation of the Australian Financial Sector

The issue of how trustworthy Australia’s financial institutions, especially its banks are, has been an increasingly controversial issue in recent years as a succession of financial scandals engulfed many of the financial sector’s most significant players. A recurring theme in debates about Australia’s financial sector has been concern about weak enforcement of existing laws and regulation. Criticism has been directed at all of Australia’s financial regulators, but especially the market conduct regulator, the Australian Securities and Investments Commission (ASIC). After spending years resisting intense pressure from many segments of the community, (including some of its own backbenchers), to establish a royal commission of inquiry to investigate misconduct in Australia’s financial sector, the conservative Commonwealth Coalition Government finally capitulated in late November 2017. Retired former High Court Judge Kenneth Hayne was appointed to investigate misconduct in Australia’s banking, superannuation and insurance industries. As 2018 has progressed a series of public hearings has revealed an appalling picture of systemic abuse and misconduct by both small and large scale Australian financial institutions. A key question has been what were the regulators, especially ASIC doing, or not doing? This paper discusses the Hayne Royal Commission, especially in relation to Australian regulatory (in)activity. Also, the paper reports on the findings of the 2018 Deloitte National Survey on Trust in Banking regarding the views of Australians on how well banks are held accountable by regulators in Australia.

The Hayne royal commission and trust issues in the regulation of the Australian financial sector

The issue of how trustworthy Australia’s financial institutions, especially its banks are, has been an increasingly controversial issue in recent years as a succession of financial scandals engulfed many of the financial sector’s most significant players. A recurring theme in debates about Australia’s financial sector has been concern about weak enforcement of existing laws and regulation. Criticism has been directed at all of Australia’s financial regulators, but especially the market conduct regulator, the Australian Securities and Investments Commission (ASIC). After spending years resisting intense pressure from many segments of the community, (including some of its own backbenchers), to establish a royal commission of inquiry to investigate misconduct in Australia’s financial sector, the conservative Commonwealth Coalition Government finally capitulated in late November 2017. Retired former High Court Judge Kenneth Hayne was appointed to investigate misconduct in Australia’s banking, superannuation and insurance industries. As 2018 has progressed a series of public hearings has revealed an appalling picture of systemic abuse and misconduct by both small and large scale Australian financial institutions. A key question has been what were the regulators, especially ASIC doing, or not doing? This paper discusses the Hayne Royal Commission, especially in relation to Australian regulatory (in)activity. Also, the paper reports on the findings of the 2018 Deloitte National Survey on Trust in Banking regarding the views of Australians on how well banks are held accountable by regulators in Australia.

The Effect of Sanctions on Continuous Disclosure Under the Responsive Enforcement Strategy: Evidence from Australia

We examine the deterrent effect of the Australian Securities and Investments Commission (ASIC)’s enforcement of continuous disclosure regulation during the period 2000–2016. Adopting a responsive regulatory approach to enforcement, ASIC has utilized its power to impose criminal, civil, and administrative sanctions on firms that have breached their continuous disclosure obligations. Focusing on these contravention cases and the type of sanctions being applied, we examine changes in market liquidity of peer firms after ASIC has taken enforcement action against a target firm in the same industry. We find that market liquidity for peer firms significantly improved relative to non-peers after ASIC imposed civil and administrative sanctions against a target firm, whereas there was no significant difference in market liquidity when criminal sanctions were levied. The increase in liquidity for peer firms persisted for up to three years. The magnitude of the deterrent effects of administrative sanctions on peer firms was substantially larger than those of criminal or civil sanctions. Contradictory to the criticisms that light sanctions are opaque, untimely, too light, and even “lazy”, our results suggest that light sanctions can successfully securing compliance form industry peers under a responsive enforcement strategy.

Supervision of the Responsible Lending Regimes: Theory, Evidence, Analysis and Reforms

National responsible lending regimes have operated in Australia since 2009, with the stated aims to encourage prudent lending, curtail undesirable market practices, and impose sanctions for irresponsible lending and leasing. This article outlines a study of the supervision of the responsible lending rules by the Australian Securities and Investments Commission (ASIC) from 2014 to mid-2017. The study finds that the Commission proactively engaged with lenders, encouraged tighter lending standards, and sought or imposed severe penalties for egregious conduct. Further, the Commission strategically targeted credit products commonly acknowledged as the riskiest or most material from a borrower's perspective, such as small amount credit contracts, interest only home loans, and car loans. Despite these positive findings, however, many households are heavily indebted and large segments of the community and the nation are highly susceptible to future harm. In this environment, we question the timeliness and sufficiency of the Commission's interventions and responses, and predict further litigation that tests the boundaries of the responsible lending rules. Moving forward, we call for more systematic supervision of responsible lending risks, practices and exposures and propose modest reforms that require lenders to better inform and engage with consumers about the risks of elevated levels of debt.

Effect of non-IFRS earnings reporting guidelines on underlying earnings reporting quality: The case of Australian listed firms

This study investigates Australian Securities Exchange (ASX) 200 firms in the post–Australian Securities and Investments Commission (ASIC) period (2011–2014) to examine how listed firms follow the non–International Financial Reporting Standards (IFRS) earnings reporting guidelines issued by ASIC to communicate underlying earnings reporting quality. We find that firms that do not comply with the ASIC guidelines have lower underlying earnings reporting quality than do firms that comply with these guidelines. Firms that do not follow the ASIC guidelines are found to exclude income‐increasing underlying earnings adjustments to make underlying earnings appear more profitable than IFRS earnings when they miss earnings targets or make current losses, and that they report underlying earnings opportunistically by excluding recurring expenses that persist into future operating earnings. Unlike ASIC non‐compliance firms, ASIC compliance firms attempt to act as responsible reporters by reporting underlying earnings in a responsible manner to demonstrate a judicious use of discretion in informing shareholders. Further, we find that underlying earnings reported by non‐compliance firms are less value‐relevant than underlying earnings reported by compliance firms.

A Contemporary Analysis of the Application of Sentencing Factors in Insider Trading Cases

Insider trading is a complex issue that involves both corporate and criminal law. Since the introduction of civil penalties, the Australian Securities and Investments Commission (ASIC) has only pursued one civil proceeding against insider trading. ASIC prefers criminal proceedings for their deterrent effects. This paper examines various features of Australian convicted insider trading cases from 2004 to the end of 2015 and provides a broad overview of the distribution of these cases. Further, this paper assesses the consistent application of sentencing factors and the determination of criminalities of different kinds of insider trading activities. Finally, this paper proposes renaming current insider trading laws to ‘dealing with privileged information’.

It's Time for Federal Regulation of Retirement Villages

As Australia's population ages, increasing numbers of seniors move to a growing number of retirement villages. Unlike time shares, which are ‘managed investment schemes’ and therefore regulated as ‘financial products’ under corporate law administered nationally by the Australian Securities and Investments Commission (ASIC), the Commonwealth withdrew from the regulation of retirement villages in the 1980s on the basis that at that time they were local, usually run by religious bodies and charities and were not of national concern. The regulation of retirement villages was taken over by the states and territories under their non-uniform Retirement Villages Acts and the common law. Until then retirement villages, often indistinguishable from Commonwealth regulated timeshares, were regulated in the original State and Territory Uniform Companies Acts in 1961 as ‘interests’, and then in later Commonwealth legislation as ‘prescribed interests’ by the forebear of ASIC, the then National Companies and Securities Commission (NCSC) with the State and Territory Corporate Affairs Commissions as its ‘delegates’. Today retirement villages, which are largely owned and managed by the corporate sector, raise many issues of national concern such as accountability, fees and the rights of residents. Some aspects of retirement villages such as directors’ duties, fundraising, prospectuses and unregistered schemes are regulated as corporations by ASIC under the Corporations Act 2001 (Cth), but retirement villages are not regulated as ‘financial products’ under corporate law. This article challenges the effectiveness of state and territory regulation of retirement villages and calls for federal regulation of retirement villages by bringing retirement villages into the definition of ‘financial product’ in the Corporations Act 2001 (Cth) and in the Australian Securities and Investments Commission Act 2001 (Cth). As financial products, retirement villages would then be regulated by Commonwealth legislation which deals with financial services and financial markets, as regulated by ASIC. These laws include consumer protection provisions such as the prohibition of misleading or deceptive conduct, unfair contract terms, unconscionable conduct, licensing and high standards for those in the retirement village industry. This would result in a return to Commonwealth leadership of the regulation of retirement villages to harmonise and to consolidate the current mix of state and territory regulation with federal legislation including an enforceable Retirement Villages Code of Conduct.

It's Time for Federal Regulation of Retirement Villages

As Australia’s population ages, increasing numbers of seniors move to a growing number of retirement villages. Unlike time shares, which are ‘managed investment schemes’ and therefore regulated as ‘financial products’ under corporate law administered nationally by the Australian Securities and Investments Commission (ASIC), the Commonwealth withdrew from the regulation of retirement villages in the 1980s on the basis that at that time they were local, usually run by religious bodies and charities and were not of national concern. The regulation of retirement villages was taken over by the States and Territories under their non-uniform Retirement Villages Acts and the common law. Until then retirement villages, often indistinguishable from Commonwealth regulated timeshares, were regulated in the original State and Territory Uniform Companies Acts in 1961 as ‘interests’, and then in later Commonwealth legislation as ‘prescribed interests’ by the forebear of ASIC, the then National Companies and Securities Commission (NCSC) with the State and Territory Corporate Affairs Commissions as its ‘delegates’. Today retirement villages, which are largely owned and managed by the corporate sector, raise many issues of national concern such as accountability, fees and the rights of residents. Some aspects of retirement villages such as directors’ duties, fundraising, prospectuses and unregistered schemes are regulated as corporations by ASIC under the Corporations Act 2001 (Cth), but retirement villages are not regulated as ‘financial products’ under corporate law. This article challenges the effectiveness of State and Territory regulation of retirement villages and calls for federal regulation of retirement villages by bringing retirement villages into the definition of ‘financial product’ in the Corporations Act 2001 (Cth) and in the Australian Securities and Investments Commission Act 2001 (Cth). As financial products, retirement villages would then be regulated by Commonwealth legislation which deals with financial services and financial markets, as regulated by ASIC. These laws include consumer protection provisions such as the prohibition of misleading or deceptive conduct, unfair contract terms, unconscionable conduct, licensing and high standards for those in the retirement village industry. This would result in a return to Commonwealth leadership of the regulation of retirement villages to harmonise and to consolidate the current mix of State and Territory regulation with federal legislation including an enforceable Retirement Villages Code of Conduct.

Report on the Undergraduate Awards Global Summit (1)

Jacqueline Williams was the overall winner in the Law category of the 2016 international Undergraduate Awards for her paper, ‘The Enforcement Regime of the Australian Securities and Investments Commission (ASIC) under Chapter 7 of the Corporations Act: Reform Required’, and attended the Prize Ceremony and Global Summit in Dublin, Ireland. A summary of her paper has been published in The Undergraduate Journal.

Penalties Regimes to Counter Corporate Misconduct in Australia Views of Governance Professionals

The issues of corporate misconduct, its effects and how regulators and other law enforcement actors respond to such behaviour are increasingly contentious in Australia and overseas. In the wake of a succession of scandals in recent years in Australia’s financial sector there has been much debate about whether the penalties regimes available to the Australian Securities and Investments Commission (ASIC) are adequate and whether they are being implemented effectively. This paper discusses these issues drawing upon the results of an online survey of members of Governance Institute of Australia (GIA) conducted in mid-2016 by researchers at the University of Melbourne. The survey responses, (n = 365), provide interesting insights into how penalties regimes to counter corporate misconduct are perceived by governance professionals.

Penalties regimes to counter corporate and financial wrongdoing in Australia – views of governance professionals

The issues of corporate misconduct, its effects and how regulators and other law enforcement actors respond to such behaviour are increasingly contentious in Australia and overseas. In the wake of a succession of scandals in recent years in Australia’s financial sector there has been much debate about whether the penalties regimes available to the Australian Securities and Investments Commission (ASIC) are adequate and whether they are being implemented effectively. This article discusses these issues drawing upon the results of an online survey of members of Governance Institute of Australia (GIA) conducted in mid-2016 by researchers at the University of Melbourne. The survey responses (n = 365) provide interesting insights into how penalties regimes to counter corporate misconduct are perceived by governance professionals.

Tone from the top: influencing conduct and culture

A speech by Greg Medcraft, Chairman, Australian Securities and Investments Commission (ASIC), Thomson Reuters 4th Annual Australian Regulatory Summit (Sydney, New South Wales,) 21 June 2016.

An Empirical Analysis of the Use of Enforceable Undertakings by the Australian Securities and Investments Commission between 1 July 1998 and 31 December 2015

This working paper reports the findings of a detailed empirical study of 414 enforceable undertakings accepted by the Australian Securities and Investments Commission (ASIC), the corporate, market, finance and credit services regulator from July 1998 to 31 December 2015, a period of 17.5 years. The study is unique in size, scope and comprehensiveness. It presents a detailed profile of all parties giving enforceable undertakings and the misconduct issues in their undertakings over a 17.5 year period; and breaks new ground by offering the first empirical analysis of the core commitments or undertakings given by parties to enforceable undertakings to rectify their misconduct. It constructs a much needed road map through the maze of regulated firms, activities, misconduct and undertakings involved in ASIC’s deployment of enforceable undertakings.