The Use of Public Warning Notices By the Australian Securities and Investments Commission – Should the Law Be Reformed?

Public warning notices are issued by regulators with the objective of preventing harm to the public. Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC), was given its public warning notice power in 2010. A recent Australian Senate committee inquiry into the collapse of the Sterling Income Trust that caused many retiree retail investors to lose both their investments and, in many cases, their homes, led to conflicting recommendations regarding the need to strengthen ASIC’s public warning notice power.

In this context, the authors have examined the use of public warning notices by ASIC and, for comparative purposes, the Australian Competition and Consumer Commission (ACCC).

The benefits of public warning notices are considered to include that they may prevent public detriment. They may also deter wrongdoing in some cases by the threat of adverse publicity. Thirdly, warning notices enable regulators to respond quickly to contraventions or suspected contraventions of consumer law by warning consumers of potentially harmful conduct when litigation against contraveners may be too slow. A possible fourth benefit is that public warning notices issued by regulators can assist in assuring consumers that information provided to them is accurate and credible.

Notwithstanding these benefits, concerns have been expressed about public warning notice powers for regulators. One concern has been that regulators may use the power to ‘name and shame’ reputable companies rather than fly-by-night operators. ‘Naming and shaming’ may have significant implications for those named, who may subsequently be found to have acted lawfully. There has also been a concern that the introduction of the power would be contrary to the right of individuals to be considered innocent until proven guilty. Related to this is the absence of an obligation on the part of the regulator to commence legal action against a business which has been the subject of a public warning notice. Further, the effect of warning notices is uncertain, including whether they deter consumers or have a longer-term effect of paradoxically promoting the company that consumers are being warned about.

The principal type of notice used by ASIC in section 12GLC(1) of the Australian Securities and Investments Commission Act 2001 (Cth) requires three things. The regulator must: have reasonable grounds to suspect that conduct may constitute a contravention of the provisions of the ASIC Act relating to unconscionable conduct or consumer protection in the case of financial services or products; be satisfied that a person has or is likely to suffer detriment as a result; and be satisfied that it is in the public interest to issue the notice.

ASIC has published only 12 public warning notices since it was given the power in 2010. Its first warning notice was published in 2012 and its last in 2023. The light use of warning notices by ASIC is similarly reflected in the issuing of public warning notices by the ACCC, which has issued only seven notices since 2010, with the most recent in 2021.

There is an important question why public warning notices have been little used by ASIC and the ACCC. Possible explanations include that the regulators consider that requirements that must be satisfied before a notice can be published are too onerous, or that other remedies are more effective, for example, an injunction to stop unlawful conduct.

The actual experience of the light use of public warning notices by regulators has run counter to the initial concerns about possible overuse or misuse of the power. Further, nine of the twelve notices issued to date by ASIC have involved activity by unlicensed persons. This focus by ASIC on unlicensed activity likely reflects a concern by ASIC of the harm that can be caused to consumers by such activity. In addition, in such cases there is unlikely to be any contest about whether a person was in fact licensed, and therefore, concerns about warnings being issued without a definitive finding of wrongdoing are not relevant. The prevalence of cases involving such easily established contravening conduct may also reflect a conservative approach to the use of the warning power by ASIC.

In response to calls for more frequent use of ASIC’s warning notice power, a majority of the Australian Senate committee in the Sterling Income Trust inquiry recommended extending ASIC’s power to include situations where ASIC has reasonable grounds to suspect a financial product or credit product has resulted, will result or is likely to result in ‘significant consumer detriment’. The minority dissenting Senate committee report called for more time to be allowed to pass before determining whether there was a need for reform.

The effect of the majority report recommendation would be that there would be no requirement for ASIC to have reasonable grounds to suspect that the conduct of the subject of a warning may constitute a contravention of a provision of the Act. This then raises the important issue of the role of ASIC in the regulation of financial products and services. ASIC is not generally a merits regulator, but severing the link to potential contraventions of the law would mean that ASIC would then become involved in a form of merits-based assessment of financial products. Difficult issues and distinctions for the regulator involving the assessment of the inherent risk of financial products and the potential for ‘significant consumer detriment’ would arise. However, the effect of this objection is diluted by the fact that ASIC has been engaged in assessments of the consumer detriment associated with financial products in relation to its product intervention power under Part 7.9A of the Corporations Act 2001 (Cth).

A final point to consider in relation to whether the warning notice power should be broadened is the effectiveness of public warning notices. The purpose of an ASIC public warning notice is to alert and inform those who are threatened by a hazard. However, there is an absence of empirical evidence that ASIC’s public warning powers are effective in deterring misconduct and protecting consumers. It is not clear that the form of the notices is effective in warning those threatened by the conduct or that these persons are even aware of or act on the notice. Reform of the public warning notice power should be guided by evidence as to whether the notices, in fact, achieve the objectives or perceived benefits which are argued to be associated with these notices.

The authors’ paper can be found here.

Lloyd Freeburn is a Research Fellow at the Melbourne Law School, University of Melbourne.

Ian Ramsay is the Redmond Barry Distinguished Professor Emeritus at the Melbourne Law School, University of Melbourne.