10 Nov 2015

ASIC’s change of stance on recovering the costs of its investigations

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The Australian Securities and Investments Commission (ASIC) has always had the power under section 91 of the Australian Securities and Investments Commission Act (Cth) 2001 (“ASIC Act”) to recover the expenses and costs of an investigation if ASIC obtains a judgment against or a conviction of the person investigated.

ASIC has rarely used this power. On 29 July 2015, ASIC announced a significant change in its stance in this regard, with potentially far-reaching consequences for the subjects of ASIC investigations, and their insurers.

ASIC’s power to make an order for reimbursement of costs

Section 91 of the ASIC Act gives ASIC the power to make an order (“ASIC Costs Order”) for the payment or reimbursement of the whole or a specified part of the expenses and costs related to an investigation it has conducted, where that investigation results in:

  • a conviction of a person (which in this context includes both individuals and corporations) of offences under Commonwealth, state or territory law, or Division 2 of Part 2 of the ASIC Act (unconscionable conduct and consumer protection in relation to financial services); or
  • the making of a judgment, a declaration or other orders against a person in a “Court of this jurisdiction” or under Division 2 of Part 2 of the ASIC Act.ASIC’s investigation expenses and costs (“Investigation Costs”) include:
  • What are ASIC’s investigation expenses and costs?
  • the salary costs and travel expenses of ASIC staff working on the investigation
  • the costs of external legal counsel
  • experts’ fees to perform any analysis or tasks as necessitated by the investigationUnlike litigation costs in court proceedings, failure to comply with an ASIC Costs Order is a strict liability offence, punishable by 50 penalty units, imprisonment for one year, or both.Information Sheet 204, released by ASIC regarding its intentions in respect of ASIC Costs Orders, notes only that ASIC has “reviewed our approach and considered that we should more frequently seek to recover” Investigation Costs. No rationale is given, but one may perhaps be found in the section of the Information Sheet which lists the factors ASIC will take into account when determining whether to make an ASIC Costs Order, one of which is the degree of cooperation provided by the person in question.How will ASIC exercise its powers?
  • Section 91 gives ASIC the discretion to make an ASIC Costs Order. ASIC’s Information Sheet identifies factors ASIC will consider before making such an order, which is noted not to be an exhaustive list and includes:
  • It may be that ASIC is seeking to persuade defendants in civil and regulatory proceedings to resolve matters earlier, whether by way of a guilty plea or a settlement, or, even earlier in the process, to persuade the subject of an ASIC investigation to admit wrongdoing to avoid the need for proceedings at all.
  • Why did ASIC change its stance?
  • Investigation Costs are distinct from litigation costs awarded to ASIC by a court if it is successful in court proceedings.
  • the ability of the person to pay the costs
  • where making an order would result in exceptional hardship to the person (for example, where either the person or someone in their family is suffering from a severe medical condition and making an order would impact on their ability to care for that person)
  • where the cost of enforcing such an order would outweigh the amount ASIC could recover
  • where ASIC has only been partly successful in the proceedings
  • where making such an order is likely to come at the expense of consumers or investors who have suffered loss
  • the degree of culpability of the person, for example if the court finds that the degree of wrongdoing was minor and less than that alleged by ASIC
  • the degree of cooperation by the person, including cooperation with the ASIC investigation as well as cooperation with subsequent proceedings, for example by pleading guilty or consenting to orders being made to resolve a matter (an example would be agreeing to an Enforceable Undertaking)
  • a limit to the expenses and costs of those parts of the investigation that were relevant to the subject matter of the proceedingWhen will ASIC’s revised approach apply?It will also apply to any person who is the subject of an investigation commenced before 29 July 2015, unless ASIC has, by that date, commenced proceedings in a court or charges have been laid against that person, or an agreement has been reached to resolve the subject matter of the investigation.ASIC will not usually seek to recover its Investigation Costs where the only grounds for exercising its powers are judgments, declarations or orders:
  • Limits on the application of ASIC’s new approach
  • ASIC’s new approach will apply to any person who is the subject of an investigation commenced after 29 July 2015.
  • Where ASIC is entitled to recover its Investigation Costs from more than one person, it can apportion the Investigation Costs between those persons, having regard to the factors above and whether some of the time and cost of the investigation can be attributed to other persons.
  • which are interlocutory in nature;
  • which are in the nature of asset preservation or travel restraint orders; or
  • made in proceedings which solely concern legal challenges to the exercise of ASIC’s powers.ASIC’s new approach gives rise to a number of questions.The threshold issue for insurers and insureds will be whether the Investigation Costs fall to be covered under the policy. Obviously it depends on the wording of the policy in question, but Investigation Costs are unlikely to fall within the scope of cover for “Legal Representation Costs” or “Enquiry Costs” provided by most policies, as that cover is generally tied to costs and expenses incurred by the insured on account of an investigation. The question will be whether they fall within the scope of cover otherwise afforded by the policy and particularly within the ambit of the insuring clause and the definition of “loss”. In circumstances where it is not a court-ordered payment, will it be covered?Question of reasonableness of the costsOn 31 August 2015, ASIC released ASIC’s Corporate Plan 2015-2016 to 2018-2019 which stated that in 2015 to 2016 its budget is around $337 million. Of that, 42% will be spent on enforcement ($141.54 million) and 19% on surveillance ($64.03 million). The Corporate Plan also refers to this power to recover Investigation Costs.The Australian Law Reform Commission (ALRC) considered the ability of regulators to recover their costs in its report ALRC 95 Principled Regulation: Federal Civil and Administrative Penalties in Australia dated 31 October 2002. The ALRC concluded that it had “reservations about providing a general right for a regulator to recover the costs of its investigations, particularly in the absence of any independent scrutiny of those claims”.ReservesPressure to settle?Noting the emphasis placed on the degree of cooperation with the investigation in determining whether to make an ASIC Costs Order, investigation subjects and their legal advisors will face pressure to form a view on the likely path ASIC will take (for example whether it is likely to prosecute or bring proceedings) and give consideration in early course to cooperating. Similarly, once proceedings have been commenced, careful consideration will have to be given whether to cooperate, accept a guilty plea or otherwise seek to compromise.It is unclear whether ASIC would be willing, at the stage of negotiating a compromise, to reveal the quantum of its Investigation Costs (in the way parties to civil proceedings might).ASIC’s decision to rely on the powers conferred by section 91 gives rise to a range of issues for persons the subject of investigations, and their insurers.
  • There is limited information regarding how the regime will operate in practice, but some possibilities are already emerging, particularly around strategy to resolution.
  • Little clarity on how the new costs regime will operate in practice
  • A factor in determining what approach to take may be the likely quantum of an ASIC Costs Order should the proceeding reach the stage of judgment or conviction.
  • Another issue is the potential for pressure on the subjects of ASIC investigations and subsequent regulatory or civil proceedings to settle earlier, to avoid significant ASIC Costs Orders.
  • A particular issue for insurers will be how to reserve for Investigation Costs, particularly given that this is a power ASIC has rarely exercised in the past and so there will be limited (if any) historical data.
  • The ALRC considered that any ability of a regulator to recover its costs had to be specifically conferred by relevant legislation and, where necessary, the rules of court. Further it recommended that any such recovery should be subject to review, assessment or taxation by a court of the regulator’s claim for its costs of investigation.
  • An intended recipient of an ASIC Costs Order may make written submissions to ASIC before ASIC makes its order, and can appeal an ASIC Costs Order to the Federal Court of Australia. There is not, however, the taxation or assessment regime that costs incurred in litigation are subject to. Will the recipient of an ASIC Costs Order need to take the matter to the Federal Court if they have concerns regarding the reasonableness of the costs incurred by ASIC?
  • Are the Investigation Costs reasonable and what avenues are available if they are not? A particular issue in this regard may be ASIC’s own internal costs which are said to comprise salary costs and travel expenses. What sort of scrutiny will there be as to reasonableness, for example the reasonableness of staffing levels, of time spent on an issue within an investigation, or on the investigation overall?
  • There may be allocation issues, noting that, whilst ASIC states that it will generally apportion the Investigation Costs between defendants having regard to relative culpability, that does not mean it will happen in all cases, nor does it mean that ASIC’s interpretation of relative responsibility will accord with that of insurers.
  • Is there cover?
  • What does this mean for the subjects of ASIC investigations and their insurers?

This article is published with the courtesy of its authors  Amanda Ryding and Laura Reisz of Colin Biggers & Paisley