Earlier this year, we published an article considering when a breach of a core obligation is likely to be significant having regard to s 912D(5)(c) of the Corporations Act, for the purposes of the ASIC reportable situation regime.
In light of recent developments in the regime (such as ASIC's proposed plans to publish firm-level data about reportable situations), it seems prudent to publish a follow-up of sorts, focusing on when non-compliance is deemed to be reportable.
In this article, we posit that non-compliance with an offence provision does not automatically give rise to a reportable situation, in circumstances where there is no fault element present. We wrote about this for the first time in 2023 and our experience over the last few years shows us that this continues to be a complex area with differing approaches taken across industry.
An overlooked aspect of ASIC's reportable situation regime
Where a licensee does not comply with an offence provision, if there is no fault element present in such non-compliance, the offence itself cannot be made out. Accordingly, no reportable situation arises.
Pursuant to section 912D(1)(a) of the Corporations Act, a "reportable situation" arises if the licensee has breached a "core obligation" and that breach is "significant".
A "core obligation" includes, amongst other things, an obligation under the financial services law: section 912D(3)(e).
Many of the provisions that are captured under this broad definition of "financial services law" are offence provisions by way of section 1311. In other words, a licensee who does not comply with one of these offence provisions is guilty of an offence: section 1311(1).
And what is a critical requirement to find someone guilty of an offence? A fault element.
While this appears clear, the consequence it has on the reportable situation regime has been overlooked and, we suspect, has led to over-reporting.
If a licensee becomes aware of its non-compliance with an offence provision, this does not mean it automatically gives rise to a reportable situation. Because if no fault element exists in respect of the non-compliance, then:
- the licensee is not guilty of the offence;
- if they are not guilty of the offence, they cannot be said to have breached a "core obligation";
- there is no deemed significant breach and no significance assessment is called for (as there has been no breach); and
- thus, no reportable situation arises.
In these circumstances, there is no need or requirement to interrogate whether non‑compliance with an offence section is significant for the purposes of section 912D(1), as breach arises in the first place.
It is important to note that this does not apply to strict or absolute liability offences (where no fault element is necessary). We canvas this aspect further below.
Some worked examples: Sections 1017D and 1017E
Subsection 1017D(1) of the Corporations Act stipulates that the issue of a financial product held by a retail client must, in accordance with subsection (2) to (6) give the holder of the financial product a periodic statement for each reporting period the product is held. Non-compliance with this section is an offence.
Applying our analysis from the section above, this would mean that if no fault element is present in non-compliance with this provision, then no reportable situation would arise.
This conclusion applies equally to the subsections (2) to (6), as they are ancillary to the obligation under subsection 1017D(1) (rather than standalone provisions).
Subsection 1017D(5), for example, lists several pieces of information that must be included in the periodic statement. It seems that subsection 1017D(5) is not a separate obligation, but rather is an ancillary provision which does not standalone as a reasonable breach reporting obligation/assessment.
It is submitted that this conclusion flows from the text outlined above, viz "must, in accordance with subsections (2) to (6), give the holder a periodic statement..."
This text, as well as consonance with general principles, indicates that subsection 1017D(5) is an ancillary provision, subsumed within subsection 1017D(1) and as such, requires no further/separate breach reporting obligation/assessment.
The conclusion is less straight forward when we consider section 1017E.
Subsection 1017E(2) contains several different obligations which will require separate assessment for breach reporting purposes.
Hence subsection 1017E(2) is a standalone obligation requiring a product provider to ensure money is paid into a specified account within a specified timeframe. The subsection does not contain a statement that non-compliance is an offence but rather refers to section 1021O, which does specify that non-compliance with subsection 1017E(2) is a strict liability offence (see subsection 1021O(1)).
Breach of subsection 1017E(2) therefore requires no assessment of a fault element in the sense that it is an offence of strict liability, although a defence of mistake of fact is available (see section 6.1 of Criminal Code Act 1995 (Cth)).
Subsection 1021O(3) additionally creates an ordinary offence in respect of the same conduct and as such introduces a parallel offence for which a fault element is required in order for the offence to be made out.
The breach of subsection 1017E(2) as a strict liability offence is not automatically taken to be a significant breach as the maximum penalty is only 60 penalty units (see subsection 912D(4)(a)). However, because no intentional or reckless fault element is required, it will still be necessary to assess significance having regard to the factors listed at 912D(5).
In other words, if the fault element is not present in relation to non-compliance with subsection 1017E(2) (and thus an ordinary offence under subsection 1021O(3) cannot be made out), one must still engage in an assessment of significance in order to determine if it is a reportable breach (see subsection 912D(5)).
In addition to the above, section 1017E creates 2 additional separate offences namely:
- subsection 1017E(3) governing when money can be withdrawn from the statutory trust account; and
- subsection 1017E(4) specifying obligations in relation to dealing with this trust money.
As an ordinary fault element offence, in order to be reportable:
- a fault element needs to be present; and
- if not, no separate assessment of significance is required.
Perhaps obviously but importantly, these 2 worked examples demonstrate that the question of whether there is a breach of an offence provision and whether a "significance" assessment is required will ultimately be a matter of construction. But when considering offence provisions, it is always important to bear in mind the requisite fault elements as part of any breach reporting assessment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
