The Royal Commission and Directors Duties
I recently had a question asked of me regarding the Royal Commission into banking and director’s duties and thought it was worth sharing.
Question:
"Hi Sarah - one of my Directors said she read about changes to Directors liabilities that occurred in February 19. I’m not aware of these. Can you tell me if this is correct and if so what amendments were made? "
My Response:
As you know, thanks to the Banking Royal Commission, there is a lot of activity in the governance space at the moment, with intense scrutiny and consideration being given to the role of directors.
The Government has been quick to begin implementing the recommendations coming from the Royal Commission, such as:
new whistle-blower protections
greater ASIC powers; and
new Penalties Bill.
For the time being, however, none of these amendments contains new obligations or liabilities for Directors.
So what has changed?
There is, however, a significant increase in both the scope and the severity of the penalty provisions - both criminal penalties and the application of civil penalties.
Pecuniary penalties under the criminal provisions have increased from $420,000 for an individual to $945,000.
Alternatively, if the court is able to determine the benefit derived from the contravention - a penalty of up to three times the benefit derived.
For Bodies Corporate the penalty will be whichever is the greater of:
45,000 penalty units ($9.45 million)
three times the benefit derived
10% of the annual turnover ending at the end of the month in which the body corporate committed the offence.
Penalties under the civil provisions are also increasing dramatically:
From $200,000 to $1.05 million for individuals and up to $10.5 million for bodies corporate.
In addition to the increase in severity of the penalty provisions, the scope of their application has also been broadened. Civil penalties will now also apply to offences against the Corporations Act particularly with respect to ASFL license holders, licensees under the Credit Act and good faith obligations under the Insurance Act.
Financial Services hit the hardest:
Directors in the financial services industry should be aware that civil penalties now apply to breaches of disclosure obligations under Chapter 7 of the Corporations Act.
Section 9 of the Corporations Act will also include a new definition of 'dishonesty', lowering the threshold for liability with dishonest intent, and in particular the general prohibition on dishonest conduct in relation to financial services.
Conduct will be considered dishonest if it is "dishonest according to the standards of ordinary people". Although there are no new or additional director responsibilities, these changes do lower the threshold for prosecution and increase the penalty for breaches of the Act.
Westpac is the first of the big four to exit Financial Planning industry.
What Next?
We anticipate additional changes to director’s duties as the Banking Royal Commission recommendations are implemented.
Although these changes will largely affect directors and even senior management in the financial services industry, all directors should continue to keep abreast of developments in the space.
If you're unsure how these changes impact - get in touch with our team and our lawyers at You Legal will be happy to assist you in whatever way we can.