DICKSON, Mr Tom, Assistant Secretary, Market Conduct Division, Department of the Treasury [by audio link]

JEREMENKO, Mr Robert, First Assistant Secretary, Market Conduct Division, Department of the Treasury

KEALL, Ms Jodi, Director, Market Conduct Division, Department of the Treasury

LaBOUCHARDIERE, Ms Claire, Senior Executive Leader, Corporations, Australian Securities and Investments Commission

MOORE, Dr Andre, Assistant Secretary, Law Division, Revenue Group, Department of the Treasury [by audio link]

SAVUNDRA, Mr Chris, General Counsel, Australian Securities and Investments Commission

WELLS, Ms Erin, Assistant Secretary, Law Division, Revenue Group, Department of the Treasury [by audio link]

YANCO, Mr Greg, Executive Director, Markets, Australian Securities and Investments Commission

CHAIR: I now welcome representatives from the Australian Securities and Investments Commission and the Treasury. Thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I remind officials that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for an explanation of policies or factual questions about when and how policies were adopted. I would like to advise witnesses that answers to questions on notice should be sent to the secretariat by 5.30 pm on Wednesday 16 June 2021. Did anyone wish to make an opening statement?

Mr Savundra : Thank you, Senator. We welcome the opportunity to appear here today. Having had the opportunity to make our submission, we're happy to go straight into questions.

Mr Jeremenko : Also no from Treasury. Thank you.

CHAIR: Thanks. Senator Patrick, did you want to start with questions?

Senator PATRICK: I'm happy to. I want to go to Treasury to start with, and I might go to my amendment to this bill, which seeks to rid the Corps Act of the loophole or the temporary measure to allow large proprietary companies not to make financial reports to ASIC. Can I just confirm people are familiar with that amendment?

Mr Jeremenko : I'm aware of the amendment. I'm not sure I would say I'm particularly familiar with the policy it's trying to achieve, but I am aware of the amendment.

Senator PATRICK: Basically what it tries to achieve is that there are no special companies in Australia that are not required to lodge financial statements with ASIC, noting that ASIC made a recommendation in the tax avoidance inquiries a few years ago that failure to lodge those statements and have them available means that it's much, much easier to engage in aggressive tax avoidance. I've not been able to get an explanation from the minister in the Senate as to why this amendment ought not to be accepted. I'm just wondering what Treasury's view on that amendment is?

Mr Jeremenko : Yes, you've moved that amendment to this bill. I would just say this bill doesn't deal with those matters. In terms of us being able to speak to it, I'm not sure whether any of my colleagues have anything they could usefully add, but I certainly haven't been involved in any discussions with government about this.

Senator PATRICK: So no-one at the table has?

Ms Keall : No, I have not been in discussions with government either.

Senator PATRICK: Maybe ASIC, who I understand are there, could respond to this?

Mr Jeremenko : We've got nothing to add on that.I don't have a briefing on it.

Senator PATRICK: So even though that amendment has been there for some significant period of time, no-one's bothered to have a look at it, to see how that might affect policy. I note that the original intent of the bill didn't want to go there, but it's certainly an omnibus bill, such that the amendment is being allowed to sit there. I thought someone may have had a look at it.

Mr Jeremenko : There's nothing I can add, sorry, to my evidence. In terms of the legislation before the committee that the government has introduced, we're across that.

Senator PATRICK: I'd ask that both Treasury and ASIC to take on notice what their views are, in respect of the amendment that I've put forward on sheet 1217.

Mr Jeremenko : Happy to take that on notice.

Senator PATRICK: Thank you. I want to go to concerns that have been raised in relation to virtual meetings. In general, there's support for virtual meetings but it's been put by some people that the legislation, as it currently stands, gives flexibility for companies to configure certain things, like annual general meetings, in a way which might suit them. Is it the case that there is no requirement to at least have a physical presence—I guess, as a minimum, a hybrid arrangement?

Mr Jeremenko : Maybe if I could just take a moment to contextualise, Senator. The bill was intending to extend or make permanent until 15 September this year the temporary measure that allowed that virtual AGM to occur. But, at the time the bill was introduced, the Treasurer also announced that following 15 September the government's intention is to create a legislative framework whereby there can be a pilot of a hybrid AGM model. That's contextualising, but to go to your specific question I might see if my colleague Jodi Keall has something to add.

Ms Keall : Yes, thank you. Senator Patrick, I believe your specific question is whether companies can choose whichever format they would like, to hold an annual general meeting, under the reforms in the bill that's in parliament right now. That is correct, the bill provides companies with the flexibility to make that choice on a temporary basis up until 15 September this year.

Senator PATRICK: What happens after 15 September?

Ms Keall : The Treasurer announced, on 17 February this year, the government's intention to introduce permanent reforms prior to 15 September this year. Those reforms will enable, on a permanent basis, companies to send meeting notices and signed documents electronically, and, as Mr Jeremenko said, will create a framework for companies to be able to hold hybrid meetings—that is, a meeting with a physical presence as well as the option to hold the technology. That will be the basis upon which the government will conduct its pilot review of hybrid annual general meetings to assess the benefits to shareholders for companies engaging with them using technology.

Senator PATRICK: I understand it to be complete flexibility under these changes. But when the Treasurer seeks to go permanent with them, he will do so with the hybrid as the default state and—you might have heard me talking to the previous witness—perhaps something like complete virtual attendance, in circumstances where you have some sort of biosecurity emergency.

Mr Jeremenko : I didn't quite hear all the evidence just before us, but the details of what this opt-in trial will be from 15 September haven't been settled yet. There will be some sort of a mechanism set up that allows the government to have that period of actual lived experience of a hybrid model, whatever it ends up being, and it could well include what you've suggested.

Senator PATRICK: Thank you. That's very helpful. Obviously, a lot of controversy sits around schedule 2. The people who've appeared before us that have supported the changes are entities that deal with good governance and represent the interests of directors, and, by their own admission, all of their members are law abiding and support continuous disclosure. In that sense, the evidence is not useful, because the changes don't affect people who are doing the right thing; they only affect the people who are doing the wrong thing. I wonder what evidence exists that grounds the need for a change?

Mr Jeremenko : If I heard you correctly, your suggestion is that the changes do not benefit those who are doing the right thing. Certainly the intention of the government is that one of the benefits of this—raising the bar for litigation—is that there will not be the reticence that some companies and directors currently have in giving that forward-looking guidance, with the fear, potentially, of having an action brought against them in the strict liability situation that the current law provides. So I'd just make that point at the outset. Having said that, I've forgotten your question at the end. Could you please repeat it?

Senator PATRICK: That conversation is quite helpful. In essence, you're saying that you're attempting to deal with an apprehension or a fear amongst company directors. So, more specifically, is there any evidence to suggest that people who are litigating against company directors are doing so in a manner that is either vexatious or unwarranted? There would clearly be cases where it is vexatious or unwarranted—but they wouldn't get very far—and there would be cases where people have absolutely done the wrong thing. I'm just trying to understand the quantum of the grey area.

Mr Jeremenko : The government's decision to introduce this bill was informed by the actual experience of the temporary measure, that was extended on one occasion, as well as the parliamentary joint committee report from December last year. I know there is some detail in there that might be worth referring to. My colleague to my left or potentially Mr Dickson might be able to speak to some more of that detail.

Senator PATRICK: Going to the evidence gathered in relation to the temporary measure, what evidence has actually been gathered? That's what I wanted to see.

Mr Dickson : I'm happy to take you through some forms of evidence. You might actually want to look at [inaudible].

CHAIR: Excuse me, Mr Dickson, are you on a speakerphone?

Mr Dickson : Yes.

CHAIR: We can't hear the audio very well. I was just wondering if you could attempt to get closer and try and speak as clearly as possible. The volume's not a problem; it's just not audible.

Mr Dickson : If we wanted to pick up, say, four ways of looking at what you might do with the evidence over a period of time. You might go to the [inaudible] that makes decisions in this space. One would be the number of actions. So if you look at the period of time from 2004 to 2008 there were 13 actions. There were 13 actions in that six-year period. Over the next six-year period, from 2010 to 2016, there were 42. Then in just the last couple of years, from 2017 to 2019, there were almost the same number of actions in that two-year period as there were in the previous six-year period. So that's just actions.

If you looked at another sort of lens, you could look at insurance premiums. You probably already heard evidence about this. Rather than looking at a long period of time, just look at 2018 and 2019 alone. So 2018 saw an 88 per cent increase in premiums, and in 2019 there was a 75 per cent increase. That's another [inaudible].

Another way you could look at it would be just through the findings of the PJC: 100-plus submissions to that process made conclusions in this area. In addition, as Mr Jeremenko mentioned, the temporary instrument has been in place for a year. One of the things that you would draw out of that temporary instrument being in place was the increased number of disclosures that occurred in that period under the temporary instrument. That goes towards Mr Jeremenko's point, which was that it appears in that period of time, by addressing the fears of company directors around disclosure, the disclosures actually did increase. Therefore you have an improvement in the functioning of the market. That would be four ways in which I think you can frame the evidence, if that helps, Senator.

Senator PATRICK: But isn't No. 2, the insurance, simply a function of what's occurred in the first method, which is that there's been an increase in litigation. Surely they are one and the same thing.

Mr Dickson : I think they're closely related, Senator, and you're correct that when you look at some of the submissions that have been provided—particularly the one from the Insurance Council—they do draw a connection between the continuous disclosure regime and their rise in premiums.

Senator PATRICK: In some sense, the next goes to: maybe the increase in the numbers of class actions is a function of access to class actions in terms of making it easy for people who simply can't take on a company on their own—an increase in the ability of people to get a number of players to commence a class action. That doesn't necessarily mean that because there are more class actions they are, in some sense, unworthy applications. It could just be the case that we've got a better system now that allows people where the wrong thing's happened to seek remedy.

Mr Dickson : One thing to bear in mind, in addition to that, would be that it's not just about the matters that go to court. A large part of the motivation, in this space, has to relate to the threat of action. I think it's worthwhile noting that if it is determined as vexatious, earlier on, one circumstance that we're dealing with here is the threat of taking legal action against a company based on a breach of the continuous disclosure obligations that can arise without incurring criminal [inaudible] negligence. The action is taken knowing that it's a strict liability affecting the law and, therefore, is exceedingly hard to defend. It may be likely for the company to settle rather than to defend them in court despite their issues. While there are bigger things to talk about, in terms of the number of actions, it may be misleading to rely entirely upon that, simply because a lot of this occurs outside of the court system.

Senator PATRICK: I guess that was my point. You were the person that put up the proposition that numbers of actions was a good measure, and I was contesting that. Because of the way this has played out, being an issue in a legislation committee rather than a references committee inquiry, I haven't quite done the right due diligence in going back and looking at all the submissions made. Have you put, on evidence, more detail around point No. 1? Is there somewhere I can go to look at that evidence in more detail?

Mr Dickson : I can certainly take that on notice for you.

Senator PATRICK: Alright, that'd be appreciated. I wonder how you couple the number of disclosures over that period of the temporary measure with any effect? Maybe there were a lot more disclosures because the circumstances were changing wildly and people simply needed to respond to the wildly fluctuating economic environment. Is there any way you could give me comfort that the number of disclosures is, in fact, also a good measure?

Mr Dickson : I realise there are limitations with interpreting that information, but it's one of several indicators that lead you to conclusions made by the government. I am happy to provide more information, on that, on notice.

Senator PATRICK: Yes, I wouldn’t mind that. For all the bad things about me, having an engineering background is probably not one of them, so I would be grateful if you could let me examine some of that evidence, supplied on notice. Thank you, Chair.

CHAIR: Thanks, Senator Patrick. Just some questions for me. I might actually start with ASIC because I don't want them to fall asleep there. Prior to the Treasurer making temporary changes to continuous disclosure laws last year, we know that ASIC told the Treasury that Australia's continuous disclosure laws were:

… fundamental tenet of our markets and is particularly important during times of market uncertainty and volatility.

Examples were the GFC and COVID-19. ASIC also said:

The economic significance of fair and efficient capital markets dwarfs any exposure to class action damages.

They are quotes from an ASIC article that was in the Guardian. Does this remain ASIC's view?

Mr Savundra : Thank you for the question. I think they were fairly basic propositions, which I think remain the case. Obviously, things have changed as a result of COVID-19. Nevertheless, I think those statements broadly remain the same in the sense that the continuous disclosure regime remains a cornerstone of maintaining the integrity of ASIC's markets and confidence in those markets. So it's absolutely central; it's critical. I think the existing laws have operated in a way which has supported that confidence and that integrity, so I think that remains the position. I think it's a separate issue as to the changes that are being sought to be made here, so I don't think the changes in any way seek to change those very high-level statements. I suspect the origin of those statements was a submission that ASIC made to the Australian Law Reform Commission inquiry into litigation funding and class actions.

CHAIR: In relation to the changes in schedule 2, will they make it more difficult for ASIC to pursue enforcement action in relation to alleged breaches of continuous disclosure laws?

Mr Savundra : Well, I think it's a fairly simple statement to say that for the purposes of enforcing civil penalty action, leaving aside other enforcement remedies which I'm happy to speak to. We would, under the proposed amendments, be required to prove the necessary fault element. So that will be an additional requirement that we will need to prove, but we have experience in proving fault elements in other provisions within the laws that we administer, and I anticipate we will need to collect that evidence and demonstrate that in order to bring court action. So it is an additional requirement. I accept that.

CHAIR: I'm relatively new to this; I'm sort of filling in as a temporary chair, so I haven't been involved over the last 12 months. I think you described those continuous disclosure regimes as a cornerstone. Can you just give me a sense, I suppose, in layman's terms as to why they are such a cornerstone.

Mr Savundra : I'm not sure. My colleague Mr Yanco might want to respond to that.

Mr Yanco : Investors are relying on information about the securities they are investing in. In our regime, we are requiring companies to continuously keep the market informed of important information for them to understand what's happening in the companies they're investing in. I think our system is globally well regarded and it's important that companies keep the market up to date, basically. So if you're an investor, you want to know what's going on in the company. Virtually in real time, companies are required to advise the market when an important change occurs.

CHAIR: How often would you take action against a company who breached those requirements?

Mr Savundra : I think in our submission we note there were somewhere around 159 investigations in the last 15 years, but I'm happy to take on notice any additional stats that you would like.

CHAIR: I suppose what I'm trying to get a sense of is: what is a standard penalty for someone who's breached?

Mr Savundra : It depends which enforcement response ASIC chooses to take. There is a suite of responses. Starting at the top are criminal offences, and there is a fault element that's required in order to prove it to the criminal standard, which is beyond a reasonable doubt. The maximum criminal penalties for a breach of the current laws is $1.332 million per contravention.

Moving to civil penalty action, that is on the balance of probabilities using a Briginshaw standard. At the moment, we don't need to prove the fault element; under the proposed reforms we will need to prove the fault element. There the maximum civil penalties for a body corporate are the highest out of three options: the first is $11.1 million per contravention; the second is three times the benefit derived or the detriment avoided; alternatively, 10 per cent of annual turnover up to $555 million. So the penalties can go very high indeed.

Then we have infringement notices. They're in administrative action; they don't require us to go to a court. We refer internally to what's known as an ASIC delegate, an independent decision-maker, who decides whether the relevant contravention has been made. There is no fault element there in relation to continuous disclosure, and the maximum penalties are prescribed by the legislation. So if the market capitalisation of the entity is in excess of $1 billion, the fixed amount is $100,000; if it's between $100 million and $1 billion market capitalisation, it's $66,000; and if it's under $100 million in terms of market capitalisation, it's $33,000.

Then we have what's known as enforceable undertakings. Generally penalties aren't levied under that, but it's effectively a contractual resolution of the matter between ASIC and the entity that we have formed the view has contravened the law.

I'd have to take on notice, Senator, out of the civil penalty court action—which is the most common response that ASIC pursues, leaving aside infringement notices. I think infringement notices are the most common, but civil penalty is more common than criminal. I'd have to take on notice what the range of penalties is, and that's taking into account that the figures that I've just given to you follow fairly significant increases in the maximum penalties which occurred during the course of last year.

CHAIR: In terms of the changes in schedule 2, has ASIC undertaken any work that would be analysis of what that would have meant historically? Would it have meant that you would have pursued fewer cases or taken up less infringement against companies that have done the wrong thing?

Mr Savundra : I'll take that on notice. We're actually undertaking that task at the moment in terms of reviewing actions that we pursued through civil penalty action to see whether we were likely to be able to prove the fault element.

CHAIR: And provide a list of those ones that you didn't think you would be able to.

Mr Savundra : Certainly. My initial view, having seen at least some of the work, is that it would be relatively few.

Mr Yanco : In terms of timing, that's quite a piece of work. I don't know that we'd be able to do that by the 16th.

Mr Savundra : I'd have to check that, but I think the work is certainly under way. I anticipate the number of cases would be relatively few.

CHAIR: We look forward to hearing from you about that. That might be interesting.

Mr Jeremenko : Senator, if I may just add, unless you're in the middle of a line of questioning and I shouldn't interrupt—

CHAIR: I was just about to get to you. All good.

Mr Jeremenko : Oh, good. I'll remain quiet until then.

CHAIR: No, you can add something.

Mr Jeremenko : Thank you. I want to just make clear that the bill doesn't change any of the requirements under Australia's continuous disclosure laws, just to contextualise it. Supporting what Mr Yanco was saying as well, entities are still required to disclose information that's not generally available which would be expected to materially affect the value of their securities if it were disclosed. They will still be liable for a failure to disclose this, they can still face class actions if they acted with knowledge, recklessness or negligence. I just think that's an important contextualisation of what this bill is trying to achieve. The standards for ASIC in terms of non-financial enforcement, the ASX suspension or de-listing and criminal liability have not changed on either. So I'm not contradicting anything that my ASIC colleagues have said; I'm just providing that broader context that the continuous disclosure rules will still remain in place and are still strong on those that are affected.

CHAIR: Very good. Now, Treasury didn't provide a written submission to this inquiry. Was as there any reason for that?

Mr Jeremenko : It's not normally the case that Treasury does for government bills. Obviously, we're here to speak to the reasons for the policy decision that sit behind the bills, but more often than not Treasury doesn't make a submission on a government bill.

CHAIR: We've been asking questions about government consultation to people who have appeared before us who have an interest over the last couple of days. For instance, the Australian Shareholders' Association weren't consulted by the government on either the temporary changes to the continuous disclosure laws last year, or on schedule 2 of the bill that we are discussing, and which would make those changes permanent. Was there any reason why? Was there any decision made not to consult with the Shareholders' Association?

Mr Jeremenko : I'm not aware of any decision to exclude anyone from consultation. My time in this role is only this calendar year; colleagues with me precede that date. But I would just add that the ability for stakeholders to give their views remains today, and it has remained all the way through. During that whole 12-month period of the temporary extension, as well as from the date of the bill, we have been listening to every stakeholder—unless colleagues want to correct my evidence on that?

CHAIR: I suppose the point with that is that—from some of the evidence that I've heard—you have reached out to and engaged some—and some haven't been reached out to. So, obviously, if you were an organisation and you know that Treasury have reached out to some organisations to engage but not to others, you'd be pretty clear on whether your views were welcome or not.

Mr Jeremenko : Certainly Treasury's general approach is to make sure that we consult with as broad a range of stakeholders that will usefully contribute views relevant to the bill. When I say 'usefully', I mean relevant to the legislation, not supporting one side or the other, if I can put it that way. It just goes to the broader issue—Treasury is obviously based in Canberra; Ms Keall here is based in Sydney; we have Melbourne and Perth offices too. We are very much out in the, in this case, the shareholder community, the director community in the financial centres, not just sitting in Canberra. So there is certainly no intention to exclude any stakeholder.

CHAIR: The government didn't consult with the Australian Investors Association?

Mr Jeremenko : I don't know the specific answer to that. Do colleagues know?

Ms Keall : Would that be the Australasian Investor Relations Association?

CHAIR: I've got here the Australian Investors Association?

Mr Jeremenko : We might have to take that on notice and get you an answer.

CHAIR: And I would also be interested to know, if there was a decision made not to consult with these groups as well: the Association of Independent Retirees?

Mr Jeremenko : We will have to take that on notice, bur we will get you an answer.

CHAIR: Self-managed Independent Superannuation Funds Association?

Mr Jeremenko : Same, we'll take that on notice.

CHAIR: National Seniors Australia?

Mr Jeremenko : Colleagues on the phone, if you do have an answer to one of these, feel free to jump in. Otherwise, I will take it on notice.

CHAIR: I think you get the gist of what I'm saying. There are significant groups out there that are potentially going to be impacted by this legislation that haven't been consulted by the government.

Mr Jeremenko : There are various types of consultations. There is consultation where the government or Treasury will reach out to individuals. There is consultation that supplements that, where sometimes there is a discussion paper or draft legislation. In this case, we had the quite unique situation where we had that temporary period, and we were living that temporary period of 12 months where, effectively what the government is trying to legislate now was in place. It's not often that you get to actually be in the environment where the bill before parliament is actually law of the land for a certain period, so that was all part of the consultation. Certainly, there is no intention or instruction that I received to exclude any stakeholder.

Mr Dickson : The further thing [inaudible] Mr Jeremenko's point is that, at the time the PJC was running its inquiry, there were 101 submissions to that, which Treasury also acknowledged. So, while we may not have met with all 101 of those [inaudible] submissions, we certainly did pay attention to those submissions that were put in, and they would have helped us inform policy [inaudible] in that space.

CHAIR: Just moving on to the insurance issue. The explanatory memorandum for the bill asserts in pretty strong terms, that the measures in schedule 2 will 'lead to significant savings on the cost of directors' and officers' insurance'. And it actually goes on to say that this will be the main impact of schedule 2. The government claims schedule 2 will result in regulatory savings in the order of $912 million dollars because of lower director and officer insurance premiums. I just wanted to know how Treasury calculated that $912 million figure.

Mr Jeremenko : Certainly. I'll pass to Mr Dickson as I know he was intimately involved in this, and he'll be able to give you an answer on that one.

Mr Dickson : Just to start with an explanation of the calculation. Under the guidelines for producing a regulatory impact statement, which would contain this estimate, there are certain rules that we follow in relation to producing costings. There's always an emphasis upon making sure that we've made every attempt we possibly can to put some figures around the expected costs and benefits of a measure. Sometimes, though, it's not possible for Treasury to provide an estimate that is precise. The reason for that can sometimes be a lack of access to data, or we may be experiencing a point in time which is so uncertain that to produce a point estimate with a degree of reliability wouldn't be the right thing to do.

In our regulatory impact statement, we produced a couple of pages—one page for that calculation, and 30 pages solely to explain the limitations that we faced when coming out with that estimate. As such, we declined to provide a precise estimate in the RIS. It was decided instead that what we would do is provide an illustrative order of magnitude so that anyone who wanted to look at the calculations can make their own assumptions and forecasts for the future and put in their own figures and come up with what they [inaudible].

Going more specifically to your question of how we actually calculate that illustrative example: after explaining that we didn't have access to commercially privileged information that insurers would use to generate their cost values, rather than [inaudible] we used an illustrative example of the value that would be generated if the annual price rises for premiums were [inaudible] and competitive with what the premiums would have been as previously determined without a change in the law. Just to go over that again, imagine that the law changed and companies were [inaudible] five per cent, and compare that to a scenario where previously they've raised 10 per cent. Then we allow them to make their own judgement as to whether or not the illustrative figures that we've provided are reasonable.

Now, the question you'd ask is: why would you pick five per cent? Why wouldn't you pick 10 per cent? We're informed largely by the submissions that we've received that talked about a historical rise in premiums brought about directly by continuous disclosure [inaudible]. Earlier on I ran through some figures where, over a period of time, there was an estimate by one brokerage supported by the ICA that reputed that premiums had risen by about 250 per cent. I think they gave evidence earlier on—something about 88 per cent in one year and 70-odd per cent in another year. So we've seen very dramatic rises and high percentage increases in premiums. We've put down what we would consider to be very modest tops of change [inaudible] that we are not attempting to make a forecast in this space because, given the volatility in that series, it wouldn't be meaningful to do that. We've revised that, and we explained that [inaudible]. Still over 75 per cent is a reasonable worry for helping people understand. It's also orders of magnitudes that we're talking about with these issues.

CHAIR: I picked up some of that. Thanks, Mr Dickson. Just following up—and I don't know if this is back to Mr Dickson or not—are you aware of the submission the Insurance Council have made to this committee on the impacts of schedule 2 on insurance premiums?

Mr Dickson : Yes, I am.

CHAIR: Effectively, they say that they don't think it will have a discernible effect in the short term or long term. I'm just trying to get a sense of what the government knows about insurance that the Insurance Council is missing out on.

Mr Dickson : So I think it's probably a question to put to the Insurance Council, but they've made a couple of statements and I'm happy to refer to the statements that we relied on. One statement that the Insurance Council submitted to the ALRC was that the [inaudible] the application of the continuous disclosure and reporting provisions had become the source of a large growth in class actions by litigation funders. The Insurance Council said that one consequence of the continuous disclosure obligation and the ongoing and increasing securities class action litigation funding activity in Australia has been an unprecedented increase in the cost of [inaudible] Australia. They also then said that, to cater for the increased insurance underwriting [inaudible] insurance premiums in the past seven years in Australia have risen on average by 250 per cent. More recently, in the first three quarters of 2019 [inaudible] 75 per cent on top of [inaudible] per cent average increase in 2018. The statement that I'm referring to seems to draw a very distinct and clear connection between the continuous disclosure rules and rises in premiums [inaudible] stand to reason that in a functioning market, if you were to address the concerns for those, you would expect to see premiums increase. So [inaudible] you [inaudible] I think, a point [inaudible] statements that may be essentially contradictory. I would suggest that perhaps you ask the Insurance Council why they came to that view.

CHAIR: I might suggest that, if there's anything further, Mr Dickson, that you wanted to add on notice, in regards to may be a response to the Insurance Council, that would be valuable from a committee point of view, because we have had a bit of a focus on the insurance today.

Mr Dickson : I'm happy to do so.

CHAIR: I'm just moving on to another topic around some of the statements the government have made. In his second reading speech in relation to this bill, the Assistant Treasurer made multiple references to 'opportunistic class actions', and he argued that schedule 2 would help to protect companies from such actions. The Treasury has been asked previously on notice to identify an 'opportunistic class action' and hasn't provided or has refused to answer. The supposed threat of opportunistic class actions is, along with a supposed impact on insurance premiums, part of the central justification for schedule 2. Could you provide any examples of opportunistic class actions that Treasury have identified?

Mr Jeremenko : The way I describe that is: a class action, or the threat of litigation for a class action, that does not require the fault element; so it does not require knowledge, recklessness or negligence. So I appreciate that the current law allows that, but the government's intention in inserting that fault requirement is to, by definition, remove the ability for actions to be taken and relied upon simply on the strict liability basis that they are now. So that would be one way of seeking to define what an opportunistic class action is.

CHAIR: Has Treasury actually gone and done the work to actually identify what they consider to be opportunistic class actions?

Mr Jeremenko : No. You will see the responses to our questions on notice. Certainly, to be able to do that, it would require, for the cases that are known, going through the detail of those cases and effectively putting ourselves in the position of the judge. An even more difficult situation is the threat of actions that the general public are not actually aware of, and that we are not aware of. To be able to apply that rule across the population is not something that we can achieve.

Mr Savundra : If I could maybe add to that and go back to the question on notice which ASIC took around identifying actions which it wouldn't have been able to bring as a result of the fault element. What we're doing there, just to clarify, is identifying matters where we haven't put forward evidence of fault. Merely because it's a very difficult exercise to do, because the fault element is not currently necessary, we may not have obtained evidence of fault because we didn't need to. That doesn't mean we couldn't necessarily have sought out that evidence or obtained it. So it is going to be a very difficult exercise to do with precision, to say these actions are now actions which we wouldn't necessarily be able to claim. What we're doing is looking at how we pleaded the case—whether we pleaded fault or not. You can't draw from that necessarily that those cases wouldn't have been able to be brought under the proposed reforms because it may be that we would have been able to obtain evidence of fault, but we just didn't need to.

CHAIR: I'm sure the committee would find any analysis you're able to provide interesting.

Mr Savundra : Great.

CHAIR: Just coming back to Mr Jeremenko, it sounds like Treasury didn't do any work to identify opportunistic class actions. Is that a correct assessment?

Mr Jeremenko : At the risk of repeating what I was saying, one way of interpreting the phrase 'opportunistic' is those actions that are simply relying on the strict liability offence that currently exists and are not being not being undertaken, apart from a profit motive of the those bringing the litigation, in any way to try and allege that the lack of disclosure was reckless or negligent.

CHAIR: Have you done work identifying those cases?

Mr Dickson : The thing that really needs to be clarified, just as Mr Jeremenko has put it, is that these activities don't often occur, or don't always occur, in the purview of the court. They occur because there is a strict liability offence, despite the best efforts and intentions of the companies to do the right thing and release forward-looking guidance. There are entities that exist to, in effect, approach these companies and suggest to them that they have breached a continuous disclosure obligation, knowing the strict liability effect, and specify that the company should settle out of court. That's why just doing an analysis of court action would be insufficient in itself, and that's why there's a challenge around undertaking analytical exercises in this space because it occurs also outside of the purview of the public.

CHAIR: So when the assistant treasurer referred to opportunistic class actions in his second reading speech, was that based on any advice from Treasury?

Mr Dickson : I can't say, but I can tell you that if you're looking for a source of where 'opportunistic' has been used elsewhere, I am aware that it's referenced in the PJC inquiry. It's in one of the paragraphs referenced in that report.

CHAIR: But I'm asking Treasury.

Mr Jeremenko : Certainly, Treasury would have provided advice to government on the recommendations coming out of the PJC, including the evidence that was presented to it, and what the government may want to do with those recommendations and that evidence, as well as the lived experience of the temporary measure. So certainly the ministers have been fully informed of the environment in which the class actions are being brought. Regarding the phraseology used, we've done our best to try and explain what that means, but—

CHAIR: Senator Patrick, did you have additional questions?

Senator PATRICK: Yes, I did, Chair, if you'll indulge me. I just want to go to the evidence you were giving Senator Chisholm—this is directed at ASIC—in relation to your submission. Your submission lists the enforcement that you've carried out and I note that you say there were 10 civil procedures, 37 infringements and five determinations made, which has the effect of perhaps increasing disclosures or at least removing the ability to have less disclosure and then enforceable undertakings. I note that one of the options available is, in fact, criminal penalties or a criminal charge, but it seems as though none have been yielded or have been attempted, if I read your submission correctly.

Mr Savundra : If I could refer you to paragraph 56 of our submission. The footnote there says, 'To date there have been no criminal prosecutions against an entity for breaching their continuous disclosure obligations'. We have had continuous disclosure related criminal prosecutions, two of them, but not for the continuous disclosure obligation, per se, by the entity. So you'll see that those are prosecutions against individuals for their involvement, causing the entity to breach their continuous disclosure obligation. Again, the reason we pursue the individuals, by and large, is for reasons of deterrence. We feel the deterrent effect is stronger where we pursue those individuals that have caused the breach of the obligations rather than pursuing an entity.

Senator PATRICK: So those two criminal charges against Mr Kirkpatrick and Mr Hart—

Mr Savundra : That's right.

Senator PATRICK: It says one of them was discontinued. What about Mr Kirkpatrick? Was that—resulted in conviction?

Mr Savundra : Yes. I think sentencing was in January 2017. I think there's a link to the media release there but I could get you more details.

Senator PATRICK: Where I'm coming from is that it appears to me that, when I look through the actions that you can take—civil penalties, infringement notices, exclusionary powers, enforceable undertakings—none of them involve the mental element, which is the change that is coming in under the legislation from the civil perspective. The criminal action does involve a fault element of recklessness or intention—something similar. I just wonder whether or not that tells me that there will be a considerable chilling of the ability for people to mount a class action, because it's clear that you have difficulty reaching those burdens in relation to criminal actions.

Mr Savundra : I don't think that that conclusion can be drawn. I think it's more around ASIC exercising its discretion about identifying the appropriate enforcement response and one that's proportionate to the need for deterrence. I think it's fair to say that, leaving aside infringement notices, the vast majority of court based enforcement of continuous disclosure has been through a civil penalty action because we feel that that's all that's necessary from a deterrent perspective. It's a fairly obvious statement, but we can't put an entity in prison, so a fine is really all we can do. I may have misheard you, Senator, but, just to be clear: under the proposed reforms, there will be a fault element for civil penalty action. All other enforcement responses don't require a fault element as ASIC still have infringement notices available to them to pursue without having to prove fault.

Senator PATRICK: Yes, I was simply making the point that, in relation to class actions, you're introducing that sort of false element, that recklessness, that intention. Just going back to the enforcements of civil penalties and infringement notices, what's the quantum of the fines that have been issued? With civil penalties, you've got 10 listed entities. What was the quantum of the penalty?

Mr Savundra : I think I took that previously on notice. I ran through the maximums and I won't do that again, but I certainly have to take on notice a list of those 10 and the range of penalties that we've achieved against the body corporate. As I said, in relation to infringement notices, those are fixed by the legislation, and there's no discretion. If it's a billion dollar market capitalisation, it's $100,000; between $100 million and a billion dollars, it's $66,000; and under $100 million capitalisation, it's $33,000. If you go back to the explanatory memorandum and the legislating of the infringement notice regime, it was intended to be for less serious continuous disclosure breaches equivalent to a parking fine, if I can put it that way. Obviously, the recipient of a notice isn't obliged under law to pay the infringement notice. They can choose to pay it or not. If they choose not to pay it, then ASIC has the option of pursuing civil penalty action as a result. So it is a useful tool for us to pursue lower-level offending just to ensure that we achieve the requisite compliance.

Senator PATRICK: So, on one side of the ledger, you've got a penalty to the company, but none of those penalties remedy the loss that may result from someone engaging improperly or not meeting their obligations. That's a fair comment, isn't it?

Mr Savundra : That's right. By and large, I think almost always in our continuous disclosure cases, ASIC has never sought compensation. I'll correct that on notice if that's not correct. But we're in the business of deterrence and imposing penalties to deter behaviour; we're not in the business in this space of seeking to recover compensation.

Senator PATRICK: So it's a separate regime.

Mr Savundra : It is.

Senator PATRICK: In some sense, we heard evidence from other witnesses saying, 'It's okay. We've got all of these other measures that are unaffected by the change of legislation.' But they go into penalising the company, not necessarily compensating the shareholders who have lost money because of it.

Mr Savundra : That's right, Senator. We are focused on penalising the company, or at least, through other means, changing their behaviour. We're not usually focused on compensation in this space.

Senator PATRICK: It's an important distinction, and I thank you for clarifying that, because one could have walked away, without your evidence, with the view that all is good. But we still need the investors cut out of this if indeed the burden imposed by the new act is such that it leaves us in a similar situation in relation to penalties, where you haven't gone down the criminal path. I suspect part of that is getting the right burden to the DPP or meeting the evidentiary burden necessary. To use an example, in the news today we've heard ASIC has initiated action in the Federal Court against Austal. I presume that none of the changes to this bill would have affected the action you're taking the Federal Court, because it deals with the penalty side of things; is that right?

Mr Savundra : I'd like to take the question on notice, but the Austal matter that we commenced in the Federal Court today is about conduct that occurred in 2016 so it won't be necessary for ASIC to prove the fault element. That doesn't mean that there won't be evidence that we'd use in the trial which would satisfy the proposed reforms. It's a difficult question to answer, and I'd need to look, but I anticipate from what I know about the case that we would have been able to bring that case under the reforms that are being proposed in this bill.

Senator PATRICK: I presume that action is not a criminal action but is to do with the civil penalty; is that right?

Mr Savundra : It's a civil penalty action both against the entity and against an individual.

Senator PATRICK: Going back to the question I put on notice in relation to my amendment, if both parties could simply lay out what they think the positives would be and what they think the negatives would be, that would be helpful.

Mr Jeremenko : We'll see what we can do.

CHAIR: Thanks, Senator Patrick—never waste an opportunity. Thanks to ASIC and Treasury for appearing before us today. We appreciate your time. That concludes today's public hearing. On behalf of the committee I thank all those who've made submissions and sent representatives here today for their cooperation with this inquiry. Thanks also to secretariat staff and to broadcasting for helping out for the day.

Committee adjourned at 15 : 52