By pursuing recent high profile cases against Richard Kamay, Steven Xiao and Oliver Curtis, ASIC has shown that it will prosecute those who have engaged or been involved in insider trading. What does this mean for you and your business?

Recent high-profile insider trading cases that have captured the public’s attention (such as those against Oliver Curtis, Richard Kamay and Steven Xiao) have seen increasingly harsh penalties being ordered by the Courts. In each of these cases, ASIC elected to pursue criminal charges due to the seriousness of the conduct.

Businesses should take note of these harsher penalties and also watch such cases with interest, because they highlight a real and emerging risk: that any individual or business caught up in allegations of insider trading (or market manipulation) is likely to face serious reputational damage.

What is insider trading?

Insider trading can be conveniently summarised as occurring when:

a person possesses “inside information” and, either by themselves, or by procuring another person to act, participates in the market for certain traded financial products (for example shares), in circumstances where they know (or ought reasonably to know) that first, the “inside information” is not generally available and, secondly, if that inside information were generally available it would be expected to have a material impact on the traded financial products.

Insider trading, along with the other market misconduct provisions (market rigging, market manipulation, false or misleading statements and dishonest conduct), attracts both civil and criminal liability.

Parts One and Two of this article relate to both types of conduct.

How do the Courts view insider trading?

Gone are the days when Australian “white collar” criminals could expect to successfully argue that insider trading offences are “victimless” and undeserving of lengthy gaol sentences.

As numerous recent cases have shown, the Courts now view insider trading is a form of cheating, with the capacity to unravel public trust, which is critical to the viability of the market. In other words, it should be considered as a form of fraud.

By way of an example, the distinction between “white collar” and “blue collar” offences was flatly dismissed by McCallum J during the recent sentencing hearing of Oliver Curtis. Addressing a submission that a non-custodial sentence would be appropriate, her Honour asked Counsel:

“”If your client had been charged with larceny, would we be having this debate? If you stole $1.4 million, would you be putting a submission for a non-custodial sentence”

Further, factors which might have once led to a reduction in sentence (such as youth, good character, lack of prior offending, the loss of future career progression and prospects of rehabilitation) are now considered unremarkable, and in the absence of an early guilty plea, are unlikely to assist a defendant to obtain a reduced sentence.

Recent cases have seen the Courts express the view that people who engage in white collar crime are generally intelligent and often have no prior criminal offences, but are driven by profit and greed and take advantage of their professional standing and demeanour.

Are the penalties for insider trading getting harsher?

In December 2010, the maximum gaol sentence for insider trading and the other market misconduct provisions doubled from 5 to 10 years imprisonment.

The maximum fine was also increased from $220,000 to either $490,000 or three times the value of the benefits obtained from the offending conduct (details on the changes to penalties for corporations are set out in Part Two).

These changes reflect a policy position that both insider trading and market misconduct should be understood (in case they were not already!) as serious criminal offences. All other things being equal, these changes will lead to more severe penalties as courts order sentences reflecting the underlying intention of the increased penalty regime.

And this has already begun to happen…

Twice in the last 12 months, a Court has ordered a record longest sentence ever for insider trading offences:

• The first instance was in July 2015, when the Victorian Court of Appeal upheld what was then Australia’s longest sentence for insider trading: 7 years and 3 months against Richard Kamay. He had conducted multiple trades over a 9 month period based on market sensitive information obtained from a friend who worked for the Australian Bureau of Statistics before that information was released to the market.
• The second instance was in March 2016, when Mr Steven Xiao, the former managing director of Hanlong Mining, received a sentence of 8 years and 3 months. He had used market sensitive information gained through his position to engage in more than 100 illegal trades, culminating in 65 contraventions of the Corporations Act.

In contrast to these record long sentences, the recent Oliver Curtis case also warrants a mention here. As those familiar with the case will know, Curtis was sentenced for a period of “only” 2 years, in part because he was being sentenced under the older, more lenient regime, as his offending conduct took place in 2007 and 2008 (i.e. before December 2010). He was therefore not at risk of setting an undesirable record.

What are the chances of getting caught?

Our discussions with ASIC indicate that the majority of market conduct issues are identified by ASIC’s own Market Analysis and Intelligence Unit. This Unit “flags” trades for review by its enforcement team, rather than relying on “suspicious activity reports” submitted to ASIC by market participants.

Further, in April 2016, ASIC received a significant funding injection to upgrade its analytics capabilities. Whilst much of this funding is earmarked for specific projects, the enhanced analytics capabilities are likely to be reflected in increased enforcement action relating to misconduct in financial markets.

ASIC boasts a success rate of around 85% in the insider trading cases it pursues where liability is determined by a Court.¹Therefore, it is imperative that those participating in the market understand the ways in which ASIC views market transactions and the limits it perceives on acceptable conduct.

But inside traders are rogues…what’s the risk to businesses?

Businesses need to be aware that if an individual is placing trades based on “inside information” on behalf of a corporation, and none of the corporate defences apply, the penalties for that corporation are particularly harsh. In fact, they could face fines of the greater of $4,950,000 or three times the benefit obtained (being generally available) or a fine as large as 10% of the corporation’s annual turnover (being available in certain circumstances).

Further, given the recent public interest in insider trading offences, the fines identified above could pale in significance compared to the reputational damage to a company. For example, a company could have its name trashed in the media based on the conduct of an employee who has engaged in insider trading as a high profile trial plays out.

Worse still would be the potential loss of business if it is a client’s inside information which has been used improperly by an employee conducting illegal trades.²In this context, it is crucial for an organisation to effectively manage these and other compliance risks, as the defences depend on compliance.

Businesses should also remember that any instance where an organisation (whether through an employee or otherwise) is found to have breached insider trading laws is likely to be treated harshly by ASIC. If a company in this situation fails to demonstrate that it had effective controls to either prevent or pick up offending conduct, or establish the basis for defences, it could face difficulties in defending such a claim in the courts and in the eyes of the public.

Directors and employees should also be aware that the rules are strict, and at times complex. For example, as we recently observed, compliance with an entity’s trading policy does not necessarily equate to compliance with the insider trading provisions.

Is there anything else businesses should know?

It should be observed that in Oliver Curtis’ case, ASIC pursued a charge of conspiracy. This decision was apparently approved by the Court despite a submission by Curtis that it was contrary to the interests of justice. In pursuing this charge, ASIC appears to be sending a message to market participants that it will pursue not only insider traders, but also those who are knowingly involved in that trading.

Interestingly, in Steven Xiao’s case, ASIC pursued the defendant despite his attempt to evade prosecution, even though this meant contesting extradition proceedings in Hong Kong. ASIC’s pursuit of Xiao is further evidence of how seriously it views contraventions of insider trading laws, and of its desire to pursue significant offenders (despite the associated cost and procedural difficulties).

ASIC maintains that one of its key goals is to ensure that Australian markets are fair and efficient.⁵ Its published results for the 6 months ending December 2015 indicate that it was particularly active in this space during that period.

Buoyed by recent success stories, we expect that this trend will continue.

Article Courtesy of

The introduction of two new types of collective investment vehicles (CIV) in the recently released federal budget is set to enhance the managed investment sector.  CIVs allow investors to pool their funds directly and have them managed by a fund manager. The most common type of CIV at present is the trust based management investment scheme (MIS).

The Government has announced plans to permit two new types of CIVs – a corporate vehicle introduced for income years starting on or after 1 July 2017, followed by a limited partnership which will be introduced on or after 1 July 2018.   The introduction of these vehicles is intended to encourage a more competitive environment in the Australian managed funds industry as it replicates CIV structures that are already internationally recognised.  This creates convenience for overseas investors interested in entering the Australian managed funds market.  Additionally, it supports other government initiatives such as the Asia Region Funds Passport which was recently implemented.  As yet, no detail of how the new CIVs will operate has been released.
However, instead of waiting for these new CIVs to be introduced, you might also consider the Early Stage Venture Capital Limited Partnership (ESVCLP) program.  This program aims to stimulate Australia’s venture capital sector by giving tax incentives to those investing in innovation companies in their early stages of growth.
An ESVCLP is a venture capital fund structured as an incorporated limited partnership (ILP) and registered with Innovation Australia.  Unlike trusts or “standard” partnerships, ILPs are legal entities that are structured to protect the personal assets of limited partners, as the entity itself is liable for all debts and obligations that arise.
To be eligible for the ESVCLP program, a partnership must meet the following criteria:

1. be an ILP that is new and not a restructure of an existing partnership; and
2. be established in Australia or a country that has a double tax agreement with Australia; and
3. have a qualifying partnership agreement that:
   1. has a general partner that is a resident of either Australia or a country that has a double tax agreement with Australia;
   2. has committed capital that is at least $10 million and does not exceed $100 million;
   3. does not have a partner that contributes more than 30% of the partnership’s committed capital (it is possible to apply to Innovation Australia for an exception);
   4. remains in existence for not less than 5 years and not more than 15 years;
   5. prohibits the addition of new partners except as provided for in the agreement;
   6. prohibits increases in capital except as provided for in the agreement;
   7. confers on a general partner the right to require partners to contribute their committed capital to the partnership;
   8. includes a plan which outlines its intended investment activities;
   9. only carries on activities related to making eligible venture capital investments;
   10. has access to the skills and resources to implement its approved investment plan;
   11. is a standalone entity that does not form part of a bigger fund; and
   12. does not hold any investments that exceed more than $250 million in assets.

The Government is proposing to change the rules for ESVCLP as follows:

1. The maximum fund size for all ESVCLPs will be increased from $100 million to $200 million;
2. ESVCLPs will no longer need to divest a company when its total assets exceed $250 million, rather a tax based concession based on its proportional interest at the time the $250 million value was exceeded will be allowed; and
3. Limited partners in new ESVCLPs will receive a 10 per cent investor tax offset on capital invested during the year.

Courtesy of Holly Nethercote Lawyers.

Our new logo represents a new change and a revised public profile.

The buzzard has been replaced by the eagle and our commencement date now appears proudly on our shield.

These two changes signal the commencement of a new approach to service delivery and ethics.

Its a new dawn and new day for all associated with Compliance National.

Thanks to all our loyal and ethical clients for your continued support, we will never let you down !

ASIC targets financial services licensees using the term “independent”

Wilson HTM Ltd (Wilson), iSelect Life Pty Ltd (iSelect) and Citywide Insurance Brokers and Financial Planners Pty Ltd (Citywide) have taken steps to remove or amend claims made about the independence of their services following concerns raised by ASIC.

ASIC’s concerns related to the use of the word “independent” in the entities’ marketing and promotional materials.

Under the Corporations Act, a person who carries on a financial services business or provides a financial service is prohibited from using the restricted terms “independent”, “impartial” or “unbiased” in relation to the business or service except where the person does not receive commissions, volume-based payments or other gifts or benefits, and operates without any conflicts of interest.

ASIC Deputy Chair Peter Kell said “The independence of financial system gatekeepers such as financial advisers is an important issue for consumers and investors and may sway their decisions about their investments or their choice of adviser. Consumers must not be misled into believing that an adviser is independent and free from influence by commissions or other benefits or associations, when that is not the case’.

Wilson and Citywide have removed the term “independent” from their websites and Wilson and iSelect have removed the term from their marketing material. In addition, Wilson, iSelect and Citywide have all taken steps to review their marketing approval processes and have fully cooperated in responding to ASIC’s concerns.

Background

Wilson and iSelect both accept volume-based payments and commissions from product issuers in relation to the provision of financial services and advice. Wilson used the term “independent” to describe its business on its website and in a brochure that was distributed to consumers. iSelect used the term “independent” to describe its services in three marketing emails that were distributed to consumers.

Citywide is a corporate authorised representative of Suncorp Financial Services Pty Ltd (Suncorp). Suncorp and its authorised representatives may be remunerated through commissions. Suncorp also sets its advisers sales and retention targets in exchange for commercial benefits such as exclusive client services rights. Citywide used the term “independent” on its website to describe its’ advisers.

ASIC has previously announced that it would publicly name entities which were found to be unlawfully making statements about the independence of the licensee or the services they provide, following an earlier surveillance project (refer 12-083MR).

Although the Future of Financial Advice (FOFA) reforms banned many forms of conflicted remuneration, some commissions and volume-based payments are exempt or grandfathered.

Following ASIC raising concerns, Urban Seed Project Marketing Pty Ltd (Urban Seed), Skybridge Portfolios (Skybridge) Pty Ltd and Tatnell DLS (Tatnell) Pty Ltd have taken steps to remove or amend potentially misleading representations about Self Managed Super Funds (SMSFs) in social media advertising.

Skybridge and Tatnell

Skybridge’s Facebook page included representations such as “Get yourself a SMSF for your Super – from $99, fully advised. No industry fund can compete with this” and “Want your Super Fund to replace your current income from work? You need to look at a SMSF – highest account balances out of all Super Funds.”

Tatnell’s YouTube videos included representations favourably comparing SMSFs to other superannuation funds without explaining or referencing the range of factors that will contribute to whether an SMSF is better performing or lower cost to consumers than industry and retail funds.

ASIC was concerned that the representations made by Skybridge and Tatnell were potentially misleading about the benefits, risks and costs associated with SMSFs. Advertisements regarding financial products, including SMSFs, should give a balanced message about the returns, features, benefits and risks associated with a product. They should also not draw comparisons with other products without qualification or substantiation.

Urban Seed

Urban Seed’s YouTube videos linked to a promotional website which included representations about “SMSF qualified” and “SMSF friendly” properties available for sale.

ASIC was concerned that the promotional website suggested that there was a category of property particularly suited to investment through an SMSF. Whether or not property is suitable for purchase through an SMSF will depend upon the investment strategy of the SMSF purchasing the property and the circumstances of the purchase.

ASIC Deputy Chair Peter Kell said, ‘Accuracy in advertising is integral to maintaining consumer trust and confidence in the SMSF sector. ASIC will continue to take action where we  see advertising that might mislead consumers, whether that advertising is on social media or more traditional media ‘

Skybridge, Urban Seed and Tatnell have all removed the relevant posts and videos, have ensured future marketing on social media will undergo appropriate review and approvals processes, and have fully cooperated in responding to ASIC’s concerns.

Background

With the growing popularity of social media sites including Facebook, Twitter and YouTube, social media has become an increasingly important channel for the promotion of financial products and services, including SMSFs.

In 2012 in response to the growth in SMSFs, ASIC established the SMSF Taskforce. A specific focus of the taskforce has been misleading advertising of SMSFs. Particular problems identified include misleading or deceptive statements about SMSF fees, returns and risks.

In 2014 and 2015 ASIC’s SMSF Taskforce expanded its work on SMSF advertising to include a review of online SMSF advertising through social media platforms such as Twitter, Facebook and Youtube.

Outcomes and actions stemming from the SMSF Taskforce include:

• Following an ASIC investigation, Ms Sarah Jane Busteed was charged with three counts of dishonestly obtaining a financial advantage by deception and one count of dealing with over $100,000 that was the proceeds of crime (refer: 16-040MR);
• Superannuation Warehouse Australia Pty Ltd was ordered to pay a penalty of $25,000 for false and misleading“Free SMSF Setup” advertising (refer: 15-332MR);
• The Supreme Court of NSW found Park Trent Properties Group Pty Ltd had been unlawfully carrying on a financial services business for over five years by providing advice to clients to purchase investment properties through a SMSF (refer: 15-300MR);
• Dixon Advisory Group Limited complied with two ASIC infringement notices, paying two $10,200 penalties after including potentially misleading claims on its website (refer: 15-207MR);
• The credit licence of Queensland-based Smithson & Baye was cancelled following an investigation into a property and SMSF promoting group (refer: 15-228MR);
• ASIC released two information sheets to improve the quality of advice provided by advisers on  SMSFs: Information Sheet 205Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206) (refer 15-192MR).
• Omniwealth Services paid a $10,200 penalty for potentially misleading claims on its website (refer: 15-190MR);
• The principal of Sherwin Financial Planners, Bradley Thomas Sherwin, was charged with fraud. The charges relate to the use of SMSFs of former clients of Sherwin Financial Planners (refer: 15-158MR);
• The Federal Court of Australia ruled that Craig Gore and several other parties and financial services businesses, including Queensland-based ActiveSuper and Royale Capital, contravened sections of the Corporations Act or were knowingly concerned in those contraventions. (refer: 15-134MR);
• Australian Financial Planning Solutions Pty Ltd paid $10,200 in penalties for potentially misleading SMSF ads (refer: 15-052MR);
• ASIC banned the founder of the Charterhill Group of Companies, George Nowak, from providing financial services until 3 July 2017 on the basis that Mr Nowak is an undischarged bankrupt (refer: 15-048MR);
• Interprac Financial Planning agreed to address ASIC concerns relating to advice provided to some clients about SMSFs (refer: 14-258MR);
• Sentry Financial Services agreed to address ASIC concerns about SMSF advice provided to clients (refer: 14-109MR);
• SuperHelp Australia paid a $10,200 penalty after making potentially misleading statements about the cost of setting up SMSF (refer: 14-051MR);
• Media Super paid $10,200 in penalties for potentially misleading SMSF ads (refer: 14-001MR);
• Spring Financial Group entered into an enforceable undertaking following ASIC concerns about the level of monitoring and supervision of its representatives (refer: 13-263MR);
• Anne Street Partners agreed to engage an independent expert following ASIC concerns about SMSF advice provided to clients (refer: 13-248MR); and
• publishing Report 337 Improving the quality of advice given to SMSF investors. (refer: 13-081MR).

SMSFs will continue to be a focus in ASIC’s enforcement work.

Following concerns raised by ASIC, ACE Insurance Limited (ACE Insurance) and Tiger Airways Australia Pty Limited (Tigerair) have removed misleading promotional statements on their websites about ACE Insurance travel insurance policies. Separately, ACE Insurance has responded to ASIC’s concerns about the misleading promotion of Priceline Protects Bill Protection Insurance Policy.

ACE Insurance and Tigerair’s promotion of ACE Insurance’s Tigerinsure travel insurance policies on their websites included claims that the insurance policies covered flight cancellation and amendment, loss of deposits and cancellation charges. However, the Tigerinsure policies excluded cover for Tigerair’s delays, cancellation or rescheduling. ASIC was concerned that the website representations were not consistent with the cover as set out in the policies and product disclosure statements. Following concerns raised by ASIC, ACE Insurance and Tigerair removed the misleading representations.

In a separate matter, the Priceline Protects Bill Protection insurance policy was promoted on the Priceline website as providing ‘up to $2,500 cover per month’ with ‘competitive premiums from $2.80* per week.’ However, in order to receive this maximum cover per month, premiums would cost around $13 per week, over four times more than the advertised price. ASIC was concerned that referring to the maximum benefit of cover (‘up to $2,500’) in conjunction with the minimum premium payable (‘from $2.80 per week’), could mislead consumers about the price of the benefit being promoted. After ASIC raised its concerns, ACE Insurance has agreed to contact its current and former policy holders and offer them a full refund of the premiums paid. ACE Insurance is no longer selling this product.

ASIC acknowledges the cooperative approach taken in responding to its concerns.

ASIC Deputy Chairman Peter Kell said ‘Insurance and other financial products should not be promoted in a way that misleads consumers about the price and benefits of the product.’

‘Consumers should be confident that they are paying the price and getting the benefits that they understand they are getting. ASIC will continue to monitor advertising to ensure it is not misleading.’

Advice for consumers

ACE Insurance will contact all Priceline Protects Bill Protection Insurance policyholders about their policies. If consumers have any queries about their Priceline Protects Bill Protection Insurance Policy, they should contact ACE Insurance on 1800 023 804.

Consumers should contact ACE Insurance if they have any concerns about their ACE Insurance travel insurance.  ACE Insurance’s telephone number (for the travel insurance policies) is 1800 803 548.

Background

ACE Insurance is the issuer of the Tigerinsure domestic insurance, the Tigerinsure International insurance and the ACE Annual Travel Insurance Policy. Tiger Airways Australia Pty Limited is an authorised representative of ACE Insurance Limited.

The Priceline Protects Bill Protection Insurance Policy was issued by ACE Insurance Limited, and promoted and distributed by Priceline Pty Limited.

ASIC has published Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance (RG 234). It contains guidance to help promoters and publishers comply with their legal obligations under consumer protection laws.

ASIC will continue to monitor advertising activities to ensure that advertising provides clear, accurate and balanced messages to assist consumers make informed decisions when purchasing financial products and services.

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

OCM pays $30,600 penalty for misleading advertising

3RD November 2015, O.C.M. Online Capital Markets Pty Ltd (OCM) has paid $30,600 in penalties after ASIC issued three infringement notices for false or misleading online advertising. Each infringement notice imposed a penalty of $10,200.

The advertisements and e-mails promoted OCM’s margin foreign exchange trading platform.  Foreign exchange derivatives and contracts for difference are among the products available for trading.

OCM made a number of claims in its advertisements and emails about the advantages of using its financial service including “$2533 in Just 7 Days!” and “Learn how you can increase your monthly income”.

ASIC believed that the advertisements and emails were misleading because:

• They gave the impression that OCM’s service could be relied upon to provide substantial profits quickly and to consistently increase one’s monthly income;
• They did not adequately convey that trading in margin foreign      exchange derivatives and contracts for difference is high risk, provides volatile returns and does not guarantee consistent profits; and;
• While they referred to risks and contained disclaimers, these      messages were in fine print and were ineffective to correct the dominant message created by the headline claims.

ASIC Commissioner Greg Tanzer said ”Margin foreign exchange and derivative trading is high risk and gives volatile returns.  Consumers should not be misled by false claims about the level or consistency of returns achievable from such trading.’

The payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.

ASIC is concerned that the following statements, which were made in Chinese, were misleading or deceptive or likely to mislead or deceive:

• 100% success rate
• pre-approvals within 15 minutes
• Melbourne’s largest Chinese mortgage broker; and
• matching of all banks’ interest rates.

The advertisements were made over the period October 2014 through to March 2015 in the Melbourne Property Weekly and on Elite Mortgage Brokers’ business website.

ASIC was concerned that statements claiming a ‘100% success rate’ were likely to be misleading because they suggest that credit will be provided to all applicants. Lenders or brokers that are subject to responsible lending obligations generally cannot claim that all applicants will receive credit – doing so is either non-compliant with the lending laws or otherwise misleading or deceptive.

ASIC was also concerned that the other statements made were likely to be misleading or deceptive, as Elite Mortgage Brokers could not properly substantiate the claims.

ASIC Deputy Chair Peter Kell said, ‘All representations made in advertising of credit-related products, including representations regarding the size of a business or the nature of services provided, must be accurate and able to be substantiated to avoid consumers being misled. This extends to ensuring consumers from non-English speaking backgrounds are not misled or deceived by advertising in a foreign language.

‘ASIC monitors all forms of advertising and will continue to monitor advertising targeted at non-English speaking consumers. Where necessary, ASIC will take enforcement action’, Mr Kell said.

Its clear that ASIC has resumed issuing new and newly endorsed AFSL’s over the past 2 weeks.

We have become aware of at lest 4 new AFSL’s issued after literally 8-12 months of application process.

Its our understanding that serious questions by the Deputy Prime Minister( under Abbott) prompted the jolt into action by ASIC.

Lets hope this continues.

The Team at CSA