ASIC releases annual financial services enforcement priorities statement for the first time

In brief - On 3 November 2022, ASIC released its Enforcement Priorities for 2023. This is the first time ASIC has issued an annual statement which identifies specific areas of focus for enforcement in the forthcoming period and importantly it provides a clear insight into some of ASIC's enforcement priorities in the financial services sector for the coming 12 months. 

It is also likely that ASIC will issue these statements on an annual basis going forward.

ASIC Deputy Chair Sarah Court announced the priorities at the ASIC Annual Forum in Sydney, stating "These priorities communicate our intent to industry and our stakeholders, and give a clear indication of where we will direct our resources and expertise". 

Areas of ASIC enforcement focus

ASIC's areas of enforcement focus are expressly set out in a Priorities Statement.

Our summary of ASIC's priorities in the table below endeavours to categorise the specific enforcement targets by financial services industry sector in order to identify the headline areas of concern for ASIC over the next 12 months per sector.

Industry Sector	Enforcement targets
Insurance	Pricing promises Unfair contract terms Design and distribution obligations
Banking and credit	Predatory lending Design and distribution obligations Pricing  Misleading conduct - sustainable finance and greenwashing High cost credit - unlicensed entities
Managed funds and investment schemes	Misleading and deceptive conduct - investment promises, risk and performance Investment scams Property schemes - governance and directors duties
Investment products	Misleading and deceptive conduct - risk, performance and nature Misconduct in crypto-assets and high risk products Design and distribution obligations Pricing Finfluencer conduct  Social media misinformation
Payments and cryptocurrency	Misconduct in crypto-assets
Superannuation	Misleading conduct Poor governance  Product design  Pricing
Commodities and derivatives	Market manipulation

ASIC enforcement agenda 

As expected, the 2023 Enforcement Priorities reflect ASIC's Corporate Plan 2021 - 2025 which was released in August 2022 and outlines ASIC's strategic priorities for the next four years and its plan of action for the year ahead.

ASIC's enforcement priorities are consistent with ASIC’s four external strategic priorities identified in ASIC's corporate plan, being:

• Product design and distribution: Reduce the risk of harm to consumers of financial and credit products, caused by poor product design, distribution and marketing, especially by driving compliance with new requirements.  

• Sustainable finance: Support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards in relation to sustainable finance.  

• Retirement decision-making: Protect consumers, especially as they plan and make decisions for retirement, with a focus on superannuation products, managed investments and financial advice.  

• Technology risks: Focus on the impacts of technology in financial markets and services, drive good cyber-risk and operational resilience practices, and act to address digitally enabled misconduct, including scams.  

Summary of headline enforcement targets and concerns

Whilst there are a range of focus areas for enforcement identified by ASIC, based on our observation and experience of the financial services market and recent trends, we anticipate that the following target areas are likely to be high on ASIC's regulatory and enforcement agenda over the next 12 months. 

Target 1 - Sustainable finance practices, greenwashing, ESG and green credentials

Given the global trend for capital markets to align with sustainability goals, ASIC has identified that:

• financial services firms and companies are increasingly reporting sustainability-related risks and opportunities in response to an increased focus on these elements by investors and stakeholders 

• with the growth in sustainability-related investment, there is an increased risk of greenwashing.

We anticipate ASIC will:

• increase its oversight of sustainability-related disclosure and governance practices of listed companies, managed funds, superannuation funds and green bonds licensing and supervision of carbon and related markets

• closely monitor sustainability-related disclosure for misleading conduct and claims of greenwashing that cannot be sustained.

In this regard, ASIC has recently issued an Information Sheet INFO 271 which provides guidance for superannuation and investment funds and can help your company avoid greenwashing or overstating green credentials.

Target 2 - Digital innovation, crypto-assets, finfluencers and investment scams

The increasing trend in digitalisation in the financial services sector, particularly during and after the pandemic has led to emerging technologies transforming global financial markets.

In the Australian financial services sector, this has led to a substantial rise in misleading or deceptive conduct, including advertising and digital promotions that misrepresent performance, risks, or the nature of products inappropriate gamification, social trading, and ‘finfluencer’ conduct.

In addition, the diverse range of technologies is enabling investment scams. 

Given economic and lending market pressures and an increased appetite for investment products with a premium return in the near future, we anticipate increasing enforcement action directed at 'finfluencers' and investment scams. A recent example is the action taken by ASIC in December 2021, to alert investors about the existence of several fake Treasury Bond offers.

ASIC has already publicly emphasised that it is ready to take "enforcement action to protect consumers from harms associated with crypto-assets, including those that mimic traditional products but seek to circumvent regulation supervising and assessing Product Disclosure Statements and target market determinations of major crypto offerings within Australia implementing and monitoring the regulatory model for exchange-traded products with underlying crypto investments". 

Target 3 - Design and distribution obligations and target market determinations 

The design and distribution obligations (DDOs), took effect on 5 October 2021 and apply to all financial product providers/distributors in the retail client segment. The implementation of these reforms required significant changes to financial services industry participants’ systems and processes.

ASIC has already undertaken targeted, risk-based surveillance and enforcement action, including issuing stop orders and other regulatory actions to address poor design and distribution of products.

In this regard:

• ASIC has recently initiated targeted surveillance to check whether product issuers and distributors are complying with their design and distribution obligations 

• In particular, ASIC issued its first stop orders under the DDOs in July 2022 in relation to three financial firms in the Managed Funds sector.

We anticipate further action by ASIC in enforcing the DDOs and the reportable situations regime, in particular, to address poor design and distribution of products, including in relation to insurance, superannuation, credit and other financial products.

ASIC has indicated that it will review and assess consumer outcomes in the credit sector by collecting data from credit card issuers, reviewing target market determinations and reviewing product governance arrangements of selected small amount credit and buy now pay later providers. This will include a review of how target market determinations were developed and the data and metrics that inform review triggers conducting surveillance of a sample of target market determinations in the superannuation and managed funds sectors.

Target 4 - Predatory lending and pricing practices

As described above, current economic conditions suggest further demand for credit cards, personal loans and short-term credit arrangements is likely to increase. 

In this regard, ASIC has identified predatory lending as a high priority and has indicated that it considers predatory lending in Australia is endemic, driven by changes to traditional banking and the growth of Buy Now Pay Later (BNPL) services.Recent examples of ASIC's enforcement response which are directed at business models that are configured to avoid consumer protection law and obligations imposed on credit providers include the:

• commencement of legal proceedings in April 2022 against Rent4Keeps and Layaway Depot, for allegedly disguising loans as lease contracts for white goods

• July 2022 product intervention orders imposing conditions on the issuing of short-term credit and continuing credit contracts to retail clients which reinforced consumer protections by prohibiting the provision of short-term credit and continuing credit contracts involving unreasonably high fees charged to retail clients, in excess of the cost caps in the relevant exemptions in subsections 6(1) and 6(5) of the National Credit Code.

In addition, there is a heavy emphasis in the 2023 Enforcement Priorities in relation to pricing promises and pricing practices. In this regard, ASIC has indicated and we expect that it will:

• engage with general insurers in relation to pricing practices; and

• review the use of unfair pricing and price optimisation practices.

This is a result of ASIC's recent civil penalty proceedings in the Federal Court against Insurance Australia Ltd (IAL) in which it was IAL’s alleged failure to honour discount promises and to disclose a “cupping mechanism” which involved the use of computer-generated algorithms to calculate insurance premiums and the renewal of existing insurance policies.

Target 5 - Property Schemes 

In 2022, ASIC observed an increase in the collapse of property investment schemes. 

Based on various liquidator's findings in relation to collapsed schemes, ASIC has detected potential breaches of directors’ duties and director misconduct, mismanagement of property schemes, including failure of a responsible entity and inappropriate financial advice relating to high-risk schemes that expose investors to significant losses.

We anticipate increased enforcement action relating to targeted property schemes directed at governance and how the schemes are being or have been managed. It is likely we will see civil penalty proceedings against directors of a responsible entity for failure to comply with directors duties, failure to implement proper governance and misleading and deceptive conduct in relation to the promotion of associated managed investment products, investment promises, fund risk and performance.

Overall, the 2023 Enforcement Priorities have a wide remit and even though ASIC has reorganised its enforcement division and has increased its resourcing, it remains to be seen how the enforcement priorities will unfold over the next 12 months. What is evident is that ASIC has specific priorities and targets in respect of which it intends to undertake targeted, risk-based surveillance and enforcement action. There is an opportunity for the financial services sector, and other sectors impacted by the enforcement priorities to review their products, pricing and distribution arrangements, product disclosure and marketing material, governance frameworks, practices and policies to ensure they are compliant and satisfactorily address relevant regulatory risks.