ASIC has released a report self-assessing itself, according to requirements of the Commonwealth Regulator Performance Framework: Report 511 ASIC self-assessment 2015–16. This requires all the Commonwealth regulators to report according to a series of Key Performance Indicators.
It is a worthy process, though being self-assessed, its value has to be seen in that light.
From an insolvency perspective, in ASIC’s Report on liaison and communication with other regulators (one of the KPIs), no mention is made of AFSA as the co-regulator of the insolvency profession. This is odd given the imminent commencement of parts of the Insolvency Law Reform Act 2016 that are of significance to both ASIC and AFSA, and which require their mutual co-operation and communication in gearing up for what is a major change in the law.
This omission may be because it is not until 1 March 2017 that the relevant part of the new law commences, whereby ASIC will be required to co-operate with AFSA, under s 10-5 of the Corporations Schedule, and vice versa under the Bankruptcy Schedule, but then only in relation to practitioners who are both liquidators and trustees. Each regulator does however also have a general obligation to work together under their governing legislation, the Public Governance, Performance and Accountability Act 2013.
Other aspects of the new law commencing on 1 March will require both agencies to work together. The new practitioner registration and discipline committees may comprise common personnel between bankruptcy and corporate. Changes in the law allow ASIC and AFSA to exchange information on conduct issues about practitioners, including with outside bodies. Criteria for registration as a liquidator include knowledge of bankruptcy, and likewise applicants for bankruptcy registration must know their corporate insolvency. Disqualifications as a trustee or liquidator include parallel disqualifications.
In relation to insolvency practice, and the changes commencing on 1 September 2017, the ILRA has harmonised much of the law in relation to meetings, communications, rights of creditors, remuneration and committees, such that the two regulators will now be oversighting compliance with the same new requirements. At the same time they themselves complying with their own common powers and duties, for example to attend creditor meetings.
On the international front, both agencies are represented at the International Association of Insolvency Regulators.
At the departmental level, there is an MOU between ASIC and AFSA of 2014, which highlights the benefits of both agencies providing advance notice where policy and regulatory changes are concerned, and also for publications and media releases, with specific reference to the option of jointly releasing policy or media statements. This would mean for example that ASICs recent draft regulatory guide on liquidator registration, disciplinary actions and insurance would have had AFSA’s input, and we should see guidance from AFSA in much the same form for trustees.
In its Report, ASIC explains that ARITA gave feedback in relation to the regulators’ KPI no 3 – that Actions undertaken by regulators are proportionate to the regulatory risk being managed – saying that this KPI was not being met by ASIC.
“that we (ASIC) are too focused on compliance and administrative issues and not sufficiently focused on substantive misconduct in this sector. In particular, ARITA commented that the extent of our resources directed at monitoring registered liquidators’ compliance with statutory lodgements and publication requirements is inappropriate and would be better spent on other issues facing the industry (such as pre-insolvency advice, director compliance, illegal phoenix activity, asset stripping, and failure to provide books and records to liquidators). They felt that we are not taking action proportionate to the regulatory risk in their industry sector”.
ARITA also commented that ASIC is not demonstrating transparency in its regulation of insolvency, examples being a
“lack of substantive detail in published enforcement outcomes, a lack of consistency of penalties and too much focus on obtaining publicly reportable outcomes”.
ASIC’s response was that it takes a risk-based approach across all the sectors it regulates.
“We have undertaken significant work on a range of matters relating to registered liquidators, including pre-insolvency advice and conduct that facilitates illegal phoenix activity, as well as our important work of building confidence in the insolvency market through compliance with reporting and publishing requirements. Lodged documents and published notices are important in allowing stakeholders to participate in the insolvency process (e.g. by alerting creditors to meetings and proving their debts). Lack of compliance can suggest more serious issues with a firm’s culture”.
That can indeed be the case, and the public record is important. But as sometimes occurs, those with the neatest files can be the ones that are not otherwise attending to their more significant duties.
As with any regulation and enforcement, much lies in the discretion of the relevant authority, and that extends down to common offence enforcement by the police. Zero tolerance has its place –
“murder and graffiti are two vastly different crimes. But they are part of the same continuum, and a climate that tolerates one is more likely to tolerate the other” –
but perhaps not in insolvency regulation. There are other better criteria to detect serious default than non-compliance with a regulation.
Part of the problem lies in the law itself, on which ASIC could well have sought reform over time – the inadequacy of the report as to affairs, the continued need for certain newspaper advertisements, the proliferation of forms spread between the ASIC forms and those in the regulations, the limited right of internet based communications and reporting, the need for physical meetings, and the advertising of committees of inspection. To some limited extent these are addressed in the new reforms.
Advertising committee meetings
As to the last item, a focus of ASIC is on whether practitioners have advertised the holding of committees of inspection, which seems to be required by Corporations Regulation 5.6.14A(1). Committees comprise a small group of creditors who agree to meet as needed. Arranging a meeting is done informally, including by phone. Whatever the law says, to always publicly advertise a private meeting seems pointless. The ASIC fee for the advertisement, on ASIC’s Public Notices Website, is $153. Some say that liquidators are not having committees or limiting their meetings to allay the cost of doing so. At least the need for ex post publication some time later when the default is detected cant be required, in light of remedial regulation 5.6.14B.
This may be the sort of issue to which ARITA refers.
AFSA issued its own self-assessment last year, for 2015-2016. As to KPI 3, it refers to its risk based Compliance Program, outlined in its Inspector-General Practice Statement (IGPS) 1 and other practice and procedural statements. It reports that much is now being ‘automated and enhanced to capture a greater range of data and intelligence to assess risk, by the end of 2016-17’. This has allowed it to ‘reduce trustee inspection numbers to facilitate targeted inspections via, as available, remeote access’. Other approaches include seeking compliance responses from trustees by email, in certain risk areas, with one aim being to reduce the regulatory impact on trustees.
The Compliance Program explains its approach in more detail. In particular, it says that a review of a trustee’s file may reveal a range of errors, many being ‘category C’ –
‘one-off practice or procedural errors and non-compliance errors that are not systemic and don’t have a significant impact on the administration, dividends, creditors, debtors’ rights or system integrity but should be brought to the attention of the practitioner and monitored’.
While creditor committees are not required to be advertised in bankruptcy, it is useful to compare what would be AFSA’s approach to a failure to advertise.
AFSA explains its regulatory approaches in ascending order of regulation – guidance to the profession; individual feedback – ‘by far the most effective means to achieve timely remedial action’; counselling; changing the risk classification of the trustee (leading to ‘a larger sample of files being selected for future annual inspections’); formal investigation and reporting; a special audit of accounts; penalties for realisations and interest charge breaches; litigation; and application for involuntary cancellation of registration.
Guidance to the profession usually comes in the form of information in AFSA’s Personal Insolvency Regulator newsletter, and its annual practitioners compliance reports. None of the issues reported there appear to be insubstantial, or comparable to unpublicised events. AFSA does record however that a ceratin number of infringement notices were issued to trustees for late filing.
In its regulatory approach, AFSA says it continues to apply the standard compliance pyramid which
‘gives people every opportunity to get it right. Research shows that a regulator should be aiming to keep practitioners at the bottom of the triangle, so Regulation and Enforcement commences on the basis of working cooperatively with practitioners using supportive regulatory strategies’.
These strategies are then listed as including
‘working collaboratively with ASIC, the co-regulator of the insolvency profession’
and with professional associations, providing guidance, providing feedback after proactive inspections, jointly developing standards with professional associations and ASIC, and providing assistance and involvement in alternative dispute resolution.
AFSA records that it meets regularly with ASIC in order to
‘ensure we understand current trends and issues that relate to practitioners who have dual registrations in both personal and corporate insolvency administration. This cultivates a collaborative and harmonised approach that strives to reduce the regulatory burden wherever possible’.
So, as to unpublicised committee meetings, its seems that AFSA’s would be one of ‘individual feedback’, something like another regulator’s ‘tea and biscuits’ approach to its regulation, suitable in this context, but not others.
The two agencies’ regulatory strategies, and cultures, are different, and ASIC’s being opaque compared with AFSA’s transparency. AFSA has a much narrower brief than ASIC, encompassing personal insolvency but also the Personal Property Securities Register, proceeds of crime and other tasks, but nothing compared with the responsibilities of ASIC. AFSA’s insolvency component is therefore significant, with a focus on technology based regulation and reporting; with ASIC, insolvency, though capably executed and administered, is very much a minor part of ASIC’s whole operations – so much so that it did not rate, apart from the prompt by ARITA, in its self-assessment report.
It is also intersting to note that AFSA refers to itself as the ‘gatekeeper’ of the operational integrity of the personal insolvency regime. In contrast, ASIC sees the various professionals it regulates as having gatekeeper responsibilities, including liquidators. To some extent, both are right, but the differing emphases are evident.
Nevertheless, the required communication and co-operation between ASIC and AFSA should fall into better place from now on, once the changes under the ILRA get into full swing. We should see joint AFSA/ASIC guidance on common issues, a consistent application of the law, and a harmonised approach to trustee and liquidator regulation, and registration, and to the use of the enforcement and discipline processes.
In fact, all this may usefully lead to a single insolvency regulator, belatedly responding to a recommendation I recall that was made in 2010.
Any comment is welcome.