We recently sat down with Navid Sedaghati, Barrister to discuss Corporations Law Litigation and as to which organisations and executives are in the sights of the regulators for prosecution in the current rapidly changing post Royal Commission legal and regulatory environment, ahead of his presentation at the 2nd Annual Corporate Governance Summit.
Has the Banking, Superannuation and Financial Services Royal Commission created an increase in litigation, or are we likely to see an increase?
The Royal Commission highlighted that too often, financial services entities that have broken the law and breached community expectations have not been held to account. Since the Royal Commission regulators have been better resourced, received additional powers and been given a mandate to enforce the law to protect consumers. For example, between July 2018 and June 2019, by ASIC alone, there was a 20% increase in the number of enforcement investigations, a 51% increase in enforcement investigations involving the big six financial services firms, and a 216% increase in wealth management investigations. Since the Royal Commission there has been an increase in the number of prosecutions by the regulators and this trend is expected to grow in the foreseeable future. It is no secret that the regulators are working on a large number of matters that will eventually hit the courts.
What seems to be the current focus of Corporate prosecutions by the regulators?
The current focus of the prosecutions by the regulators appears to be on fairness. Where there is evidence of organisations abusing their power or market position or resources to take advantage of their customers, to profit at the expense of their customers, where organisations did not fairly deal with their customers, where organisations abused their power and unethically took advantage of their customers, then they and their executives would be the higher priority in the sights of the regulators.
Have you noticed any recent changes in the mindset of the regulators when it comes to Corporations Law Litigation?
There has recently been a noticeable change in the mindset of the regulators, more so since the criticism which the regulators and the government received during the Banking Royal Commission, for having previously been too soft. Even though most large organisations do the right thing, the small minority that abuse their power are no longer as easily able to get away with abusing their power and taking advantage of their relatively weaker customers. People whom have had enough, being out with torches and pitchforks in angry mobs is thankfully not part of the Australian psyche. Even though some organisations and executives of the small number of transgressors just as the likes of Tsar Nicholas II, Louis XVI, Marie Antoinette may feel that they are too big and powerful to ever be genuinely held to account. Many parliamentarians from all sides of politics are aware of the simmering grassroot public sentiment, and that with the change in technology, telecommunication and connectivity, Australian society is also changing. Which is why, notwithstanding the government’s initial resistance to a Royal Commission, this Royal Commission took place, and since then additional resources and powers have been provided to the regulators. Since 13 March 2019 as a result of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 civil penalties now apply to certain misconducts that previously had no penalties. Maximum prison sentences for serious offences has increased to 15 years, civil penalties for individuals has increased to $1.05 million, and most significantly penalties for companies has increased to $525 million. The regulators are expected to exercise their new powers and seek these greater penalties in the near future. If these gestures and the regulators fail to bring about a change in behaviour, it is anticipated that further powers and greater penalties may be enacted, if the regulators fail in their duties the parliamentarians may act, if the parliamentarians from all sides of politics fail then the electorate may act at the ballot box.
Banks have been under fire in recent years, but what other industries should be tightening their corporate governance processes?
The impact of the Banking, Superannuation and Financial Services Royal Commission, the abuse of power by a small minority which it shed light on, has brought about a change in mindset and greater resources for the regulators which has an impact well beyond the Banks, Building Societies and the Financial Services Sector. Any corporation that has a substantial market share, or has substantial power over their customers, should pay greater attention to their governance processes to ensure that in addition to satisfying their legal obligations, they are treating their customers ethically and fairly, that they are meeting community expectations, and are ensuring that they are not abusing their power in their pursuit of profits. The recent key word coming out of the regulators is ‘fairly’, taking action against those whom have been abusing their power or whom have not been treating their customers fairly seems to be the current mantra.
What is the most interesting thing which you have recently heard from a regulator?
One of the most interesting things which I recently heard from a senior figure at one of the regulators was with respect to the ‘cost of doing business mindset’ which they are going to prevent with their additional resources and powers. The Ford Pinto case from the 1970s was mentioned, where in the 1970’s some at the company had considered that it was cheaper to pay out victims whom due to a design fault of the vehicles would burn and or die in an accident than to fix the problem. With the new resources and powers Australian regulator do not intend to allow the impact of fines or penalties for the corporations and individuals which they prosecute to merely be a cost of doing business, rather they intend to ensure that such penalties are serious enough to have a significant impact on corporations and their related individuals so as to bring about a change in behaviour and genuinely punish wrongdoers.
What is the most interesting change in behaviour or mindset you can see with respect to Corporate prosecutions by the regulators?
The most interesting change in mindset that I can see with respect to corporate prosecutions by the regulators is the gradual shift from the previous mindset that if an organisation was one of the largest in a particular sector it could merely get a minor slap on the wrist for misconduct whilst not being allowed to fail, towards the mindset that no corporation irrespective of its market share in a sector should be allowed to misbehave with impunity. Future breaches and corporate scandals by the next wave of misbehaving minority in any of the key sectors may force through further changes that may have more serious ramifications for corporations and their related individuals. This change in mindset is the reason for the awakening by the astute institutions and is the reason for the current waive of financial sector remediation costs, as the astute institutions are trying to fairly settle claims from the victims of their past misdeeds, whilst for now attempting not to commit many more, so as to bounce back and thrive, as they are aware that otherwise in this new world their future could be too bleak to imagine.
Navid Sedaghati is a Barrister at Thirteen Wentworth Selborne Chambers specialising in Corporations Law. Navid brings 18 years of litigation experience when advising and advocating for clients. In recognition of his expertise and the successful outcomes he has attained for his clients, Navid was a finalist in the 2019 Australian Law Awards for Barrister of the year. In 2018 he was part of the team that formulated the Financial Services Sector’s submissions to the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Sector, known as the Hayne Royal Commission. You may connect with Navid via LinkedIn 
or on his website
