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Guest: After penalty reforms – whither peer review?

October 31, 2019

 

 

As part of a major package of reforms to penalties which came into effect on 13 March this year[1], the highest maximum penalty for a market participant (stockbroker or futures dealer) for a contravention of the Market Integrity Rules (MIRs)[2] rose 315%, from $1m to $3.15m.[3]  Moreover, the increase in maximum penalty to $3.15m applied to all penalties under the MIRs, even for lesser contraventions. Accordingly, failure to notify ASIC of suspicious market activity[4] (previously $20,000), and failure to keep records of client orders[5] (previously $100,000) now carry maximum penalties of $3.15m.

 

This substantial increase may have a significant effect on the statutory peer review mechanism which applies to market participants.

 

Changes to market supervision from ASX to ASIC

In March 2010, the Federal Government announced its support for competition between market operators in ASX-listed securities, and in-principle support for the granting of a market operator’s licence to Chi-X Australia Pty Limited[6]. With these structural changes, ASX could no longer be the market regulator for multiple exchanges which traded ASX-listed securities. Accordingly, on 1 August 2010, ASIC assumed responsibility for supervision of all market operators (exchanges), and market participants (stockbrokers and futures dealers)[7].

 

ASX ‘peer review’ replicated

In establishing the new regulatory scheme in 2010, the Government replicated the ‘peer review’ disciplinary process which had been operated for many years by ASX and its predecessor State exchanges, with the creation of the Markets Disciplinary Panel (Panel). The Panel comprises senior members of the stockbroking and futures industries. While it is an independent body, the Panel operates as a ‘Division’ of ASIC, exercising delegated power to hold hearings and issue infringement notices where it finds a contravention[8].

 

During consultation on these provisions in 2010, the Government stated:

Being issued with an infringement notice provides the recipient with the option of complying with the notice (which may involve any or all of the payment of a penalty less than that which could be applied in a court, implementing corrective measures, accepting an undertaking or otherwise accepting sanctions), or defending civil proceedings should ASIC seek to pursue them. As with other infringement notice regimes, such as the continuous disclosure and consumer credit infringement notice regimes, the intent of this regime is to facilitate efficient redress without disadvantaging parties.[9] (emphasis added)


The statutory discount

Consistent with the Government’s approach during consultation, the 2010 provisions included a mechanism designed to encourage market participants to accept the infringement notice issued by the Panel, and to pay the penalty. This was achieved by placing a limit on the maximum penalty which could be imposed in an infringement notice issued by the Panel. Such a penalty was capped at three-fifths of that which could be imposed by a Court.[10] Therefore, for the most serious contravention of the MIRs - which at the time carried a maximum penalty of $1m– an infringement notice issued by the Panel could only carry a maximum penalty of $600,000. If a market participant does not comply with an infringement notice issued by the Panel, ASIC has the power to take civil penalty proceedings against the participant in Court[11].

 

Discount abolished

The Penalties Act 2019 did not carry over the reduction in the maximum penalty that can be imposed by the Panel. Therefore, from 13 March 2019 the maximum penalty that can be applied in an infringement notice issued by the Panel has risen 525%, from $600,000 to $3.15m.

 

MDP Record since 2010

In terms of the disposal of matters, since its inception in 2010, the Panel process and the statutory incentive to accept an infringement notice and pay the penalty appear to have worked very well. The infringement notice penalty has been paid by the stockbroker or futures dealer in 68 out of 69 cases, thus disposing of matters before the Panel without the need for ASIC to issue civil penalty proceedings. In one case, the stockbroker did not comply with an infringement notice, and ASIC took civil penalty action in the Federal Court.[12]. In total, since 2010, market participants have paid over $7.5m in fines from the 69 matters heard by the Panel and the Court.[13]

 

Whither peer review?

 

The Penalties Act 2019 reforms not only substantially increased the maximum penalties for contraventions of the MIRs; they also removed the statutory incentive designed to encourage compliance with infringement notices issued by the Panel. This runs counter to the original reason for the 'discount' to infringement notice penalties, namely, to encourage market participants to pay the penalty under an infringement notice, and dispose of the matter at the 'peer review' stage, without the need for lengthy and expensive court proceedings. The effect of the loss of this discount is further amplified by the substantial increase in headline penalties.

 

As no published matters have been determined by the Panel which involve contraventions which occurred after 13 March 2019, it remains to be seen how the Panel applies these increased penalties, and whether the loss of the incentive to dispose of matters at the Panel stage will see more cases taken to Court. However, contrary to the Government’s original reason for the incentive, it is difficult to see how the latest penalty reforms will facilitate efficient redress, or effective regulation, for market participants, or indeed, for ASIC.

 

 

About the Author 

 

 

 

 

 

 

 

 

 

 

 

 

 

The author is a legal & compliance adviser and trainer in the stockbroking and securities industry, and was formerly Policy Executive with the Stockbrokers Association

 

 

 

 

End notes 

 

 

[1] Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Penalties Act 2019)

 

[2] ASIC Market Integrity Rules (Securities Markets) 2017

 

[3] Penalties Act 2019 Section 49 sets the penalty at 15,000 penalty units for a body corporate and 3,000 penalty units for an individual. Only penalties for body corporates are referred to in this article.  (The Crimes Act 1914, as amended by the Crimes Amendment (Penalty Unit) Act 2017 sets penalty units - currently $210, with indexation due in 2020)

 

[4] MIR 5.11.1

 

[5] MIR 4.1.1

 

[6] The Hon Chris Bowen MP, Minister for Financial Services, Superannuation and Corporate Law, Media Release No. 032, Government announces competition in financial markets, 31 March 2010

 

[7] Corporations Amendment (Financial Market Supervision) Act 2010

 

[8] See discussion of the legal basis and powers of the Panel in ASIC Regulatory Guide 216 Markets Disciplinary Panel July 2010 (reissued August 2019) Part B

 

[9] Treasury Commentary and Consultation on the Market Supervision Regulations May 2010 page 3

 

[10] Formerly in Corporations Act 2001 Section 798K(2)

 

[11] Corporations Act 2001 Section 1317E

 

[12] ASIC v State One Stockbroking Limited [2018] FCA 1830– see ASIC Media Release dated 21 November 2018

 

[13] Source: ASIC MDP Outcomes Register on www.asic.gov.au

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