Australian watchdog ASIC has suggested that companies will fare better if they sort wrongdoing earlier. What does this mean for boards?
Directors should closely follow the latest developments in Australia, where a national corporate watchdog has attempted to “draw a line in the sand” amid a long-running case of corporate wrongdoing.
In the years since, the watchdog has stepped in and managed much of the remediation directly, ordering the businesses to pay vast sums in compensation.
Pivotally though, a senior agency figure has said that now is the time for the companies involved to take ownership of that compensation and that not doing so could cost them more long term.
What’s going on?
In the late 2010s, a government commission reported extensive financial malpractice within some of Australia’s most prominent businesses, including Commonwealth Bank, Westpac, and IAG.
Its report included findings of facilitating money laundering, rip-off customer charges, junk insurance tactics and charging fees to dead people.
Since then, Australia’s corporate regulator ASIC (Australian Securities and Investments Commission) has been heavily involved in ensuring compensation is provided to victims – to the tune of AU$5.6 billion so far.
Now, ASIC wants companies to continue this process on their own.
What is ASIC’s view?
ASIC does not want to manage such large volumes of compensation claims any longer and has put the onus on the companies involved to take its place. It has issued a new guide for this purpose and told companies that they must act fast.
Moreover, it has pinpointed governance issues that these companies will need to address to avoid a repeat of the scandal in future.
“The common stumbling block we have seen across remediations is underinvestment in systems,” ASIC’s deputy chair Karen Chester said in a statement this week.
“This underinvestment has led to a trifecta of failures. First and foremost, in delivering on promises to consumers, second in identifying the failures and third in being able to remediate consumer loss in a timely way.”
She called on the businesses involved to “get on with fair and timely remediations” and said her agency would directly oversee only a few cases going forward.
What should boards take from this?
One of ASIC’s biggest frustrations is that, once businesses flagged a problem, they were often slow to act on compensation. This was now a “thing of the past”, Taylor told the Guardian Australia.
“We all acknowledge boards had a wake-up call with the royal commission [which originally uncovered the wrongdoing],” she said. “But boards have equally had a wake-up call that remediation costs a lot more if they don’t get it done early.”
“…If the last six years tells us anything, it is if you find a problem and you don’t deal with it quickly, it’s going to cost a lot more.”
This is the message boards should take from ASIC’s current stance, and it resonates globally, not just in Australia.
It’s all about risk
Boards have a pivotal role in shaping a company’s response to suspected foul play. They can either pick a “hands-off” approach – letting the watchdog do all the work – or conduct their own probes quickly and make the regulator’s role more manageable.
Regulators, meanwhile, are tightening their grip on the corporate world. They reward cooperative companies and punish uncooperative ones. Frequently, this punishment translates to more significant fines or elongated investigations, which can mean increased legal costs, more consultancy fees and a heightened risk to PR – essentially a board’s main operational risk concerns.
Boards should always be aware that taking a “hands off” approach increases the risk of severe organisational damage. In the eyes of authorities, this approach is lazy at best and harmful at worst. It demonstrates indifference and won’t win you any confidence from the very people who regulate your business.
ASIC ultimately expects companies to pay a total of AU$7.2 billion in remediation as part of this scandal. This means $1.6 billion is left to go, and releasing “do it yourself” guidance has made it clear who it expects to manage this remaining balance.
No board will want to hear that their company has facilitated financial wrongdoing, particularly for extended periods, but it does happen.
Importantly, boards should always be aware of the risks they take in their response because there is always a chance that doing nothing will worsen the fallout.