Will the Senate Committee report on ASIC’s performance be the trigger for class actions against financial planners?

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8 July 2014

The Senate Economic References Committee report into the Performance of ASIC has set the stage for opportunistic litigation by plaintiff firms and litigation funders. Class actions have already been foreshadowed and some plaintiff law firms have been reported as saying “the phones are running hot”.

Not only are Australian Financial Services Licence holders likely to see an increase in traditional claims involving financial planners, but AFSL holders may be exposed to new claims including class actions that draw attention to perceived failures in management oversight and internal compliance programs. 

The report also foreshadows the potential for claims against financial institutions alleging breaches of the responsible lending obligations under the National Consumer Credit Protection Act 2009.

Moreover, the ‘hyped’ environment may encourage an increase in corporate whistleblowing (whether to ASIC or the media) leading to exposure of perceived issues within an organisation well before an organisation has identified or is ready to deal with those issues. 

The pressure is ASIC on to deliver results for consumers

Not only has the report generated intense media scrutiny of the financial planning industry, it has also called for increased action by ASIC, both in terms of policing implementation of the new credit laws and more broadly in relation to its enforcement action. 

In particular, the report questions ASIC’s approach to the use of enforceable undertakings. The Committee’s Chair suggested ASIC should not be concerned with the financial burden to institutions in complying with enforceable undertakings. 

Moreover, the report was critical of what it saw as ASIC’s reliance on negotiating settlements and enforceable undertakings rather than initiating court proceedings. The Committee’s view is that while enforceable undertakings may lead to corrective action within a particular organisation, they did not yield the regulatory benefits associated with successful court action. 

Ultimately, the Committee made a number of recommendations directed towards strengthening the terms of enforceable undertakings (in particular remedial action) and increasing the transparency of ongoing compliance monitoring. 

In its response to the report’s recommendations, ASIC commented that it had already made several changes to its procedures including increased transparency of its processes and the way it ensures enforceable undertakings deliver good results for consumers.

Steps to minimise litigation risk and regulator criticism

Given this environment, AFSL holders should take steps now to identify and minimise the risk of litigation and regulator criticism and/or enforcement action.

An internal review to identify and address high risk issues is a logical starting point. For more on the internal compliance consequences of the committee’s recommendations click here. Whistleblower policies should also be reviewed to ensure they encourage employees to raise issues internally and deal with claims within the confines of current legislative requirements. For more on how to prepare for increased whistleblower activity click here.

Legal teams and risk and compliance teams should be starting conversations now to identify measures that, to the extent possible, preserve legal privilege in communications that are confidential and made for the purpose of giving or receiving legal advice. This is of utmost importance for internal review programs designed to identify high risk files or to identify failures in oversight. 

It’s also important to:

  • Put in place measures to protect the integrity of documents and prevent information being tampered with or destroyed;
  • Limit communications generated in the course of an investigation to essential recipients only;
  • Ensure the confidentiality of communications is maintained where internal review programs are undertaken for the purpose of obtaining legal advice either from in house legal teams or external firms; and
  • Consider whether to engage external legal advisors to provide advice on internal review processes and legal liability where high risk issues are likely to exist. 

Be aware that privileged documents cannot be withheld in some circumstances, from a royal commission.  Accordingly, teams conducting internal reviews should be mindful about limiting document creation to only those documents necessary for the internal review.

In the event that issues likely to pose litigation risks are identified, proactive steps can be taken to mitigate the risk of proceedings being commenced. This might include early engagement with stakeholders as well as alternative methods of dispute resolution such as early and appropriate compensation properly documented in deeds of release. 

Ultimately, it is identifying issues early that will best protect an AFSL holder from not only the risk of litigation but also the reputational damage arising from litigation. 




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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